Cash & Bonds Insurance (investment) bonds

I am looking to invest 10k long term (10-15 years) with regular top-ups of 2k yearly for my kids in a vehicle that would produce the highest return once transferred in their name. Initially i was going to aggressively (no bonds/cash) invest into ETF/LICS [50% VAS, 25% VGE, 10% DRJE and 15% MIR] as trustee for the kids and personally pay tax on the income and also CGT on transfer but i stumbled onto Insurance Bonds.

Is anyone long term investing in insurance bonds for their kids? I believe minimum holding duration without tax liability is 10 years and on the vesting date it will transfer to the child without CGT. Additionally management fees are high at around 1.5%-2% but i am not sure if the free brokerage and no CGT on transfer would negate these high fees.

Does anyone have any experience or comments with this product?

 

Investment bonds can be an excellent structure to invest through if you've got a 10+ year time frame in the manner described.

They're not an investment themselves though, just a tax effective structure. It's the funds that are invested in that do this.

And the fees do seem to be a bit high.

 

That seems interesting. Any big names in this game with proven track record?

 

Bigdaddy,

You posted you were looking at some passive Vanguard ETFs.

It is possible to invest into Vanguard and Blackrock/iShares funds through "Generation Life" insurance/investment bond fees are higher in this structure than outside but the Vanguard and Blackrock/iShares options are obviously a lot lower cost than what you appear to have looked at.

I think from memory the full fee for these was around 60-70bps but have not double checked. Link to their website below.


genlife.com.au .. you can access pds and everything through the website.

 

Insurance bonds are 'tax paid' investments because the company pays tax on the earnings before declaring returns

If you held in a low income earners account it would be less tax paid, you also get 50% CGT discount

 

Have you considered DSSP plans such as what is offered by AFI?

 

No not yet, i will look into them. It sounds like a good way to save on brokerage

 

It's not so much about brokerage, but rather about not taking in income (therefore no tax payable) by choosing the DSSP plan over the DRP plan/cash. Sure, you forfeit the franking credits, but minors would have a higher tax rate anyway. If purchased as trustee, you would then not run into the CGT as well.
Only interesting if the kids will hold onto the shares and not sell though, as the DSSP affects the cost base. The idea is it can be turned off to take the dividends when required.

not advice etc

 

I don't really see how investment bonds can ever be beneficial, even if your marginal tax rate is 47%. If you just buy regular shares, you get a CGT discount after ten years, so you only pay 23.5% tax when you sell. But if you buy investment bonds, you get slugged 30% corporate tax on the capital gains each year, plus fees! Why would you choose this?

 

From what I have heard from a few podcasts, investment bonds can be a good strategy when Investing for children in the sense that they are a lot easier when its time to handover compared to other products like ETFS etc.

 

I have a few thousand in each of my kids savings accounts that they have accumulated from birthday money and I top them each up with $50 per week. I had them sitting in the crappy dollar mites accounts. I became interested in investment/insurance bonds after reading the Barefoot Investor. I went in to the kids bank with the intention of setting them up there and then, but when I went in and enquired, they didn't seem to know much and sent me in to the financial planner's office. I told him what I was after, however he wanted a full picture of my finances. I told him I'm happy with all of my other investments/insurance etc etc. I just wanted somewhere better to park the kids savings than their crappy savings accounts. Im also looking for them not to touch them for 10+ years. The financial planner couldn't provide me with any info, he wanted me to make a formal appointment (for a fee) so that he could put together options most suitable. I got up and left as I really didn't want any financial advise other than the product advise for the investment bonds. I don't trust banks own financial planners with my financial planning so Im now back to square one with no further info and the kids savings still sitting in a low interest bearing account, although I moved them out of CBA into ING accounts that I set up for them. I really need to find the time to research this myself I think

 

If you have a $5000+ balance, the easiest method would be to set up a Vanguard retail fund. You can BPay the $50 per week into it. The MER is higher than ETFs at 0.90%, but for the convenience of BPay with small amounts it a great set-and-forget option.
Investment Products

 

Thanks, I will have to do some research on this. Its all a bit overwhelming as I have never looked into shares/funds at all.

 

Do what works for you, but to me 0.9% MER seems exorbitant for an index fund! That's more than you'd pay for some of the investment bonds. I don't have kids yet, but I think I will just keep it simple and buy index ETFs and LICs directly in my name with them as trustee once born. No extra layer of fees, no false claims that I'll be saving tax, and I have full control over it. I'm a novice at this so I'm still looking for articles or statistics that might change my mind.

 

Insurance bonds - Linky

 

The MER includes brokerage ( or brokerage is free) so add up all your brokerage costs with other security's and factor those costs into the MER. If you have 100k for the wholesale funds then MER is cheaper again

 

That's fine if you are purchasing in lump sums, but for the example above with only a few thousand balance, $10 brokerage each time on a weekly $50 purchase is much more expensive than a 0.9% MER with BPay purchases.

 

Good point. For those people who buy regular parcels they would save a stack on brokerage. I've just started looking at the Vanguard Diversified High Growth Index retail fund, which also has MER 0.9%, but could be worthwhile as a standalone investment for a child, without doing anything else. https://api.vanguard.com/rs/gre/gls/stable/documents/8298/au

Does anyone know what would be involved in transferring the retail fund to a child who turns 18? With shareholdings it's an off-market transfer which costs about $55 per holding.

 

Do you have a source for your statement about yearly CGT? I have never heard of this...

 

I'm not an expert, but as far as I can tell from reading different articles, this is what happens. I'm happy to be wrong.
How tax effective are investment bonds over 10 years? | Money Management
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