Financial planning with investment bonds pays off

Offering long-term tax benefits and a stable source of revenue, investment bonds are also very handy when it comes to planning your estate. With the help of some careful financial advice, the choice to include tax-effective investment bonds in your portfolio can set up yourself and your loved ones for life. 

What is an investment bond?

When governments and companies need to raise funds, they issue investment bonds as a type of debt security. 

Investing in bonds essentially means loaning your money to a corporation or the government for a fixed period of time. 

In return, investors receive regular interest payments, called coupon payments. The bond issuer also guarantees the investors will have their principal returned on a given date, when the bond reaches maturity.

Investment bonds are considered a long-term, defensive, lower risk asset and less volatile than growth investments, like futures, stocks and real estate. 

At Poole Advisory, we think they are especially useful as an alternative tool when it comes to estate planning – more on that later!

How does an investment bond work?

Investment bonds all have a set principal or ‘face value’ when they are first issued. 

The face value will be the amount payable to you by the company or the government once the bond has reached maturity. 

If you choose to sell a bond before it reaches maturity – and where the bond is quoted on a securities exchange like the ASX –  the investor can realise their investment by selling that bond to another investor at the current market price. 

The market value may be lower than the face value and is influenced by:

• Interest rate changes 
• When the bond is due to mature 
• Credit risk of the issuer
• Level of liquidity (how easily the bond can be converted to cash).

How long does it take for bonds to reach maturity?

To be the most tax-effective, you’ll need to hold your investment bond for at least 10 years. When it’s held for a decade or more, no additional tax is payable on the investment earnings after that period.

Note: Investment bonds offer the opportunity to make additional contributions over the life of the bond, with many investors choosing to reinvest their coupon payments.

What are the types of bonds?

Australian Government Bonds (AGBs)

Issued by the Australian government, Australian Government Bonds (also known as Treasury Bonds) represent Australia’s sovereign debt (how much the government has borrowed).

Treasury Bonds are guaranteed a rate of return if they are held until maturity. 

Exchange-traded Treasury Bonds (eTBs) provide fixed interest payments. While Exchange-traded Treasury Indexed Bonds (eTIBs) provide interest payments which are linked to inflation.

You can buy and sell listed AGBs on the Australian Securities Exchange (ASX) at market value plus any brokerage fees.

Semi-government Bonds (Semis)

Much like Commonwealth AGBs, Semi-government Bonds are issued by Australian states and territories, and sold through state and territory treasury corporations. They come in a variety of maturities and pay different rates of interest. 

The yields on Semi-government Bonds reflect the additional credit risk of a state government over the Federal Government and are generally marginally higher than AGBs.

Corporate bonds

To finance their business activities, companies raise money from investors by issuing corporate bonds. They are primarily traded over-the-counter (OTC) through institutional broker-dealers.

You can discover more by taking the ASX online Government Bonds course.

How can bonds work for me?  

• Investment bonds can provide a stable source of income and protect the money you invest. 
• They are considered less risky than growth assets like shares and property, and they can help to diversify your investment portfolio.
• Investment bonds are an effective way of providing for estate planning and the transfer of intergenerational wealth.
• Inflation-linked bonds can help hedge against inflation.
• They can be tax effective for investors with a marginal tax rate above 30%.
• Tax on investment earnings is paid at the applicable company rate of 30% by the bond issuer – not by the investor.
• If investment bonds are held for 10 years, investors can access the funds as a tax-free lump sum or via tax-free regular withdrawals without any capital gains tax or personal income tax implications.

What are the risks?

• Interest rate fluctuations could reduce the market value of the bond. If interest rates rise, bonds offering lower coupon payment rates become less attractive investments.
• They could pose a credit risk if the issuer defaults or goes insolvent, meaning you won’t receive coupon payments and may not get your face value back.
• Some corporate bond offerings can be dodgy, so it is essential to be wary of scams. 
• Before buying corporate bonds,  do your homework and talk to your financial advisor. Confirm that the company’s prospectus is lodged on ASIC’s offer notice board. And make sure the prospectus is from a legitimate source by going to the issuer’s website and downloading the application form from there. Always make sure you have read and understood the prospectus. 

Looking after the next generation with your bonds

Investment bonds have proven to be an efficient and cost-effective tool in estate planning and intergenerational wealth transfer, offering certainty of how your wealth will be distributed once you’re gone. 

Here’s why we recommend Poole Advisory clients talk to us before deciding that bond investments will form part of your estate planning:

1. They are particularly beneficial if you have concerns about potential challenges and claims to your estate.
2. Sitting outside of your will, any funds placed within a bond form no part of your estate and cannot be challenged if you have nominated a beneficiary. 
3. You can name individuals, trusts, charities and companies to receive your bond proceeds.
4. Beneficiaries receive the proceeds tax-free, regardless of whether or not the investment has been held for 10 years. 
5. In most cases, investment bonds can also be transferred to your nominated beneficiary more quickly and efficiently than other financial products.

For more information on how Poole Advisory can help you with investing in bonds as part of your portfolio’s estate planning, get in touch today or book an appointment. 

Compliance Disclaimer: 

This information contains general advice only, that is, advice which does not take into account your needs, objectives, or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial or credit advice that addresses your specific needs and situation before making investment or borrowing decisions. Taxation information is based on our interpretation of the relevant laws as at 1 July 2018. While every care has been taken in the preparation of this information, Prosperitas Partners Pty Ltd does not guarantee the accuracy or completeness of the information. The case studies are hypothetical, for illustration purposes only and are not based on actual returns

Poole Advisory Pty Ltd ABN 15 642 040 604 is a Corporate Authorised Representative (No. 001282603) of Prosperitas Partners Pty Ltd ABN 30 662 654 453 AFSL 544 917