Cash & Bonds Thoughts on Insurance Bonds?

There are some excellent comments re Insurance Bonds at long term invst for kids however I thought I would create a new thread without the reference to "kids" in the title to attract a wider audience.

I'm in the very early stages of considering Insurance Bonds as an alternative to additional concessional Super contributions and/or long-term holds of LIC/ETF style investments.

The concessional tax treatment is certainly appealing for someone on the 39% (inc Medicare levy) tax rate, and the 10 year hold requirement is acceptable (especially compared with Super which I can only access in more than double that time frame).

I am also encouraged that there are some providers that offer reasonable choice of the underlying investments (eg Austock options included Magellan for international shares, Investors Mutual + Fidelity (as a bundle) for Australian shares and Vanguard international and Australian share index options amongst others.

I still need to do a lot of sums to work out if this is a worthwhile strategy for me. Meanwhile, does anyone have any comments / experiences not captured in the earlier thread? Thoughts on risks of Insurance Bonds vs directly investing in the underlying products?

Thanks, Mim.

 

Tax treatment of super is better than insurance bonds, but you can access the funds in an insurance bond. The in the wider market the actual investments within both structures tend to be the same (usually a range of managed funds which invest in all sorts of things), although you won't see any self managed insurance bonds.

It probably comes down to the time frame. If you're investing with a view to retirement then super. If it's about a 10 year time, the insurance bond probably works better.

 

Thanks Peter. Yes, I guess my question is more about the comparison between Insurance Bonds and direct LICS/ETFs than concessional Super. I came back to clarify, but you beat me to it!

The estate planning aspect is not particularly significant to me - no kids or step-kids (and unlikely to be).

 

I think it comes down to your goals as well. I would not look at Insurance bond and LIC/ETF approach as one why not both. I get that underlying assets will be equities but there is lot of diversification in equities as well. I like insurance bond and believe it should grow further as Super get more and more restricted. I like the 125% rule and have that money drawn tax free after 10 yrs as income stream or lump sum. I'm invested in both austock & lifeplan currently and plan to do as much contribution allowed and build an income stream out of that. Super will always be better for tax treatment but i've 30+ years to go before i access that. If I need to retire early i gota look at something like bonds, tax free after 10 yrs, continue holding after 10 yrs, no limitations on contribution (125% rule), decent estate planning, most importantly no risk of govt changing rule on that like super.

 

Nice post i have been reading up on these as well and have noticed austock life have lowered their management costs for the vanguard growth index from .90% to.65% pa to go with the wholesale fee of.36%.

Therefore the total fee of the fund being 1.01% pa and having tax capped at 30% flat rate it seems like a pretty viable option to go down thos route instead of purchasing the retail vanguard growth fund at.90% whilst being taxed at personal marginal tax rates in my case 39%.

Am i missing something?? only early days in reading up on these products!

 

Thank you for the contributions. After some more research, if I am not mistaken the 'catch' is that you lose eligibility for the 50% discount on gains in capital on assets held for more than 12 months. I really hope I am wrong, but that's the way I am interpreting it.

For me, the type of investments I am interested in, and a pure 'how much will the investment return to my pocket after 10 years' point of view, I don't think the Insurance Bonds are better (and may be worse) than investing in the ETFs / LICs / Managed Funds direct. Of course, it is impossible to predict the future and I have had to make a lot of assumptions in my modelling, but that it is looking at the moment.

I can see that others with different circumstances could reach a different conclusion.

Am I right or wrong about the CGT?

 

you'll find the tax they pay is not always 30% flat. some are less...i think its due to franking credits and other deductions. If they've reduced fees...that's even better.

Also, I believe 30% tax rate is linked to comapy tax rate hence if company tax rates goes down....so should this.

 

Not sure how you are comparing this with 50% CGT discount. Seek specific tax advise but the way i understand is if u hold these for 10 years they are tax free.If you withdraw them earlier, depends which year they come with tax offset.

 

I think the other benefit of insurance bond is asset transfer to another beneficiary tax free

 

Money Smart says this about CGT "Investments are not normally subject to capital gains tax." https://www.moneysmart.gov.au/investing/complex-investments/investment-and-insurance-bonds

I only Googled for a couple of seconds, but I couldn't find anything on Insurance Bonds and CGT on the ATO site.

 

I've found the whole research exercise quite frustrating. So much spin in the PDSs and newpaper articles (as expected), but even resources like the government Moneysmart website are revealing in what they DON'T say.

Everything is very careful to say "tax paid" or "tax free to you" without 100% spelling out how tax on growth within the bond is calculated and paid by the bond entity.

I noticed that the unit prices shown by Austock for, eg, Magellan Global Fund are very different from the unit prices shown by Magellan themselves. There is also no drop in the unit price on 30 June to account for the distribution. I suspect the bond fund is doing some sort of smoothing or adjustment, possibly also to account for capital gains within the bond.

There is also this interesting statement in the Austock PDS:

"
Normal CGT does not apply – realised gains on investment assets
are taxable and realised losses are immediately deductible.
At the Investment Portfolio level, net increases in unrealised
capital are treated as income of the Fund. (A tax provision is
created.) Net losses in the value of the same assets are treated
as deductions. This tax treatment is consistent with more
accurate and fair Unit pricing due to increases or decreases
(both realised and unrealised gains) in the value of investment
assets being brought to account on an ongoing basis.
"

I'm not confident enough to move forward for now. But if my circumstances change in the future I may decide that some of the other advantages make insurance bonds worthwhile.

Thanks for the contributions.

 

I noticed the same thing with the vanguard wholesale fund, skimming unit prices!

Very frustrating trying to gather info as it is literally all over the shop and also noticed variance in buy/sell spreads too!

 

Came across this one today (skip the first one but the rest go on about insurance bonds).

Linky

The last one is a big oops (so commonly mentioned on this site or variations of it).

 

From Reddit re: Insurance Bonds

CGT is paid from within the fund, so you invest $100,000 and have capital gains of $100,000, for a total of $200,000, the fund will pay the CGT and you will receive $170,000 (200k, minus 30% on the 100k cap gains).

That's why they can say 'you don't pay capital gains tax' - you don't pay it, but the investment fund does.

If you would like further resources, please see the following:

Investment bonds are ‘tax paid’ investments, with income and capital gains taxed at a maximum rate of 30% within the bond.

http://www.onepath.com.au/public/pdfs/L2530_TEIB_QA.pdf

The downside of an insurance bond is that any realised capital gains are fully taxed at the 30% company tax rate because companies (including life insurance companies) are not eligible for any discounts. But it is the total after-tax return that is important to compare.

http://www.strategysteps.com.au/articles/taxation/5534-investment-bonds-%E2%80%93-high-income-strategy