Part 1: Investment Bonds- What is an Investment Bond and How Does it Work?

Investment bonds have become a popular investment option over the years in Australia for many. Especially, for those in particular circumstances such as growing a family, nearing retirement, or becoming a business owner.

What makes investment bonds so appealing is:

  • The significant tax advantages 
  • How they can be used to build wealth
  • How they can be part of your regular savings plan


This article will delve more into these tax advantages and the many other benefits of this investment type.


What is an investment bond?

An investment bond is considered a long-term investment strategy. Also known as an insurance bond, an investment bond is a combination of an investment portfolio and a life insurance policy, but without the insurance protection part.

It’s a tax-effective, flexible and simple way of saving money. Over time, your money will grow for as long as it’s kept within the investment bond.

If you invest in an investment bond for at least 10 years, the tax on your investment earnings (including any additional contributions), will be paid for by the bond insurer. Plus, withdrawals after the 10th investment year will be free of any personal tax.

Investors typically choose to invest an amount upfront (usually a minimum investment of $1,000) and have the option to make frequent contributions during the period the bond is held. 

Additional contributions will depend on your personal savings goals and investment objectives. It may be beneficial to assess your financial situation with an expert financial adviser before making extra contributions so you can ensure it’s aligned with achieving your financial goals.

You may be confused if an investment bond is the same as investing in a bond, it’s important to understand the difference.

Difference Between a Bond and an Investment Bond:

  • A bond is an investment where you loan your money to a company or government. The issuer of the bond then agrees to pay you back the face value of the loan on a specific date and to pay you periodic, fixed interest payments (which are usually twice per year).
  • Investment bonds (or insurance bonds) are an investment vehicle, similar to a managed fund or superannuation, which holds investments such as stocks and bonds. For as long as your money is kept within the investment bond, it will continue to be invested on your behalf and ideally, grow over time.


What Range of Investment Options Are Available Through an Investment Bond?

Investment bonds offer a wide range of investment options for you to choose from. Depending on your investment strategies, you can choose from a range of asset classes such as:

  • property
  • shares
  • fixed interest
  • cash
  • international shares


By having full control over your investment decisions regarding how your money will be invested, you can ensure you’ll receive your desired investment returns.


What is the 125% Rule of Investment Bonds?

There is no limit to how much you’d like your original investment to be. There is, however, a limit to how much you can contribute to your investment bond the following years after your initial investment if you are wanting to take advantage of the tax benefits. 

Your additional investments must not exceed 125% of the investment made in the previous year if you want to be eligible to receive the ‘tax-paid’ returns after the 10-year period. 

If your contributions in an investment year do exceed 125% of the previous year’s contributions, your 10-year period will re-start. 

For example, if you invest $10,000 in year one, then, using the 125% rule, up to $12,500 (125%* 10,000) may be invested in year 2, and so on.


Who Are Investment Bonds Suitable For?

  • High-income earners may find this to be a tax-effective strategy since investment bonds have tax paid on their investment earnings at 30%.
  • Those looking for alternative investment options outside of their super may want to invest any additional funds that exceed the super contribution caps into an investment bond.
    Unlike your super, there are no contribution limits (besides the 125% contribution rule) or restrictions to accessing your wealth at any time.
  • Some Age Pension recipients and Aged Care residents may gain assistance through their investment bonds with means-income tested age pension entitlements and this could help to reduce aged care resident fees.
  • Those looking to qualify for other Government benefits may – depending on their personal financial situation – use investment bonds to help them qualify for other Government benefits like the Commonwealth Seniors Health Card.


To determine if an investment bond is well-suited to your needs, seek advice from an expert. A financial adviser can help you develop a financial plan that includes tailored strategies to help you secure your financial future.

If you want to learn more about the Benefits of an Investment Bond, check out our article: Investment Bonds Part 2: What are the benefits of an Investment Bond.


Seek an Experienced Wealth Creation and Investment Adviser Today!

At Poole Advisory, we offer a range of investment advisory services and wealth creation solutions to help you achieve financial freedom.

Whether you’re an experienced investor looking to grow your wealth or a novice who is interested in taking the first steps towards creating a successful investment portfolio, our experienced wealth advice team can support you with investment bonds.

Speak to an investment adviser today by  booking a complimentary 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

Get in touch

Learn more

Related Articles

Learn more

Related Articles