MUCH OF FINANCIAL PLANNING IS FOCUSSED ON SAVING FOR RETIREMENT AND THE SUPERANNUATION SYSTEM.
But that can seem distant for many in their 20s, 30s, and even 40s, who have more immediate investment goals. A house deposit, renovations, a round-the-world holiday, private schooling – these and other goals require significant savings. How can young adults save up for these big expenses?
Fortunately, there is a way that you can invest and save in a tax-effective manner: Investment Bonds. Also known as Insurance Bonds, these are long-term investments with tax advantages for anyone on a marginal tax rate higher than 30%, which is anyone with a taxable income higher than $37,000.
How it works is fairly straightforward, with some important rules. Investment bonds are provided by many large Australian financial institutions, and after you choose the provider you can select a portfolio that matches your investment risk profile. You might choose conservative, lower-risk investments, a portfolio of higher-risk but higher-return investments, or a more balanced option in between.
You start with an initial investment and then make regular contributions. Each year, the total of your contributions can increase by up to 25% compared to the year before – so, for example, if in the first year you contribute $100 per month, in the second year you can contribute up to $125 per month. Earnings in the investments are taxed at only the 30% corporate tax rate. As long as you don’t make withdrawals or exceed the 25% annual increase limit within a ten-year period, you can withdraw the full balance without paying capital gains tax or having it included in your taxable income.
So what does this mean? For example, if you:
- invest $1,000 in an investment bond with a growth portfolio averaging 7.5% returns
- contribute $100 per month, utilising the full 25% increase each year,
In ten years you could withdraw approximately $53,000 with no more tax to pay.
It could pay for your house deposit or much-needed renovations for a growing family. It could go towards putting your kids in the best schools, or you might want to spend it on the holiday of a lifetime. Whatever your goals, an investment bond is an excellent way to achieve tax-effective returns from your savings.
To find out more, contact your licensed financial planner today.