Investment bonds emerge as a unique solution. They are a tax-effective and flexible solution to help address wealth transfer across generations, which at times can also be an emotive driven process.
The shifting superannuation landscape
Treasurer Jim Chalmers’s announcement in 2023, of the Federal Government’s intention to legislate the purpose of superannuation signalled another cycle for the superannuation system. The proposed objective of these changes is to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”ᵃ This announcement emphasised the importance of superannuation to preserve savings, with the objective of providing a dignified retirement, not a tax-effective way to transfer wealth and certainly not an estate planning vehicle.
Changes to the superannuation system are not unprecedented. Indeed, there have been numerous small adjustments and over 30 substantial modifications to the system since it was first mandated. These changes often occur due to shifts in government policies, economic considerations, or to address evolving retirement landscape needs.
The Federal Government’s proposed Division 296 tax on earnings of superannuation account balances greater than $3m introduces a new taxation regime, marking a significant departure from how superannuation has been previously taxed, and presenting investors with different considerations to incorporate into their financial planning strategies.
Investment bonds: A tax-effective complementary structure to superannuation
Amidst this evolving landscape, investment bonds emerge as a strategic complementary investment structure to superannuation, offering unique advantages tailored to the needs of high-net-worth individuals. Similar to superannuation, investment bonds can provide significant investment choice ranging from cash to international shares and more, through a tax-paid investment structure taxed at a maximum rate of 30%, with the effective tax rate anticipated to be significantly lower over the long-term.
Governed by Life Insurance and Tax legislation, investment bonds have a consistent legislative framework designed to facilitate both the accumulation and distribution of wealth. Unlike superannuation, investment bonds offer greater tax-effective wealth transfer flexibility. With the ability to nominate anyone as a beneficiary and in some cases options to restrict access to funds, investment bonds can offer responsible wealth transfers across generations.
When compared to superannuation, investment bonds present several distinct advantages. These include the ability to transfer ownership without triggering capital gains tax and the absence of restrictions on contributions and withdrawals. This flexibility resonates with investors seeking to optimise wealth creation, protect family assets and enhancing the certainty of estate planning outcomes.
Generation Life’s Tax-Aware Process
Generation Life’s award winning tax-aware process positions investment bonds as an even more attractive option. Through innovative strategies like offsetting investment losses against income, we have significantly reduced the impact of tax on investment returns. The focus on reducing tax can bring the effective long-term tax rate down to as low as 12-15% over a 15-year periodᵇ, maximising after-tax performance and optimising wealth accumulation for investors.
Exploring alternative tax structures
Understanding the tax treatment of various investment structures is crucial for high-net-worth individuals navigating today’s complex financial landscape. While trust and company structures each have their place, investment bonds also stand out for their tax advantages, flexibility, cost effectiveness and simplicity to implement and manage. By carefully evaluating the tax implications of each structure, investors can work with their financial adviser to make informed decisions that align with their financial goals, family dynamics and wealth transfer objectives.
Using Investment Bonds for Estate Planning
Beyond their role in wealth accumulation, investment bonds serve as invaluable tools for estate planning. They offer the ability to be a non-estate asset, nominate beneficiaries, and bypass probate. Investment bonds also offer a streamlined approach to wealth transfer that minimise delays and administrative burdens.
Additionally, the flexibility to control when and how beneficiaries receive inheritances, with the added layer of protection in the event of bankruptcy, further enhance the appeal of investment bonds. Investment bonds are effective estate planning solutions, that ensure the safeguarding of investments for future generations.
The new generation of investment bonds
As the financial landscape continues to evolve, investors must remain vigilant in reassessing their investment strategies to adapt to changing legislative frameworks and market conditions. Investment bonds, with their tax efficiency, flexibility, and estate planning benefits, offer a compelling solution for investors seeking to optimise wealth accumulation and intergenerational wealth transfers. With Generation Life’s tax-aware process enhancing the appeal of investment bonds, now is the time for investors to explore these strategic solutions with their financial advisers to secure their financial future in an ever-changing world.
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ᵃ https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/consultation-begins-legislating-objective-super
ᵇ Indicative effective average tax rates – these represent the estimated effective average annual tax as a percentage of earnings for each 12-month period over a period of 15 years. Actual tax amounts payable are not guaranteed and may vary from year to year based on the earnings of investment option(s).
