*For Australia* Investment bonds, known as insurance bonds or growth bonds

[Grogounet]

Hi Everyone -
I have my eye on this investment.
I won't be, unless change of plans, FIRE in the next 12 years.
This investment seems really tax effective in a 10 year time frame.
Questions: Where do find these? Has anyone bought any of these?
I've seen so far Commbank and AMP. Haven't checked their fees but my guess is that they would be high.
Trying to find cheap accessible funds.. :-)

Cheers
Gro

[Grogounet]

In case it helps, I will use these guys:
cheapest alternatives with Vanguard investing options

https://www.lifeplan.com.au/lifeplan-products/nextgen-investments

[faramund]

Well, I went and looked at
https://www.lifeplan.com.au/lifeplan-products/performance-and-unit-prices#nextgeninvestments

and their annual returns since inception seem to range between 2.6 and 6.81% a year. Although one made 10% (which was Australia share based) and one made 13% (which was property based).

But I just don't 'get it' Vanguard all australian shares, or property have returned more than the 2.6 and 6.81%, and their shares, and property are pretty much the same as the above.

What does 'tax advantaged' mean for these funds.

I can't see why you'd buy these rather than just the Vanguard options - if all they mean by tax advantaged, is that you don't pay very much capital gains tax, and you get franking credits - that's what Vanguard does. All in all, I think you should just go vanguard. Why over complicate this?

[Grogounet]

I read differently:
Vanguard Aussie shares have returned 7.84% per annum
Inter shares 12.75%

Well, for few reasons:
- For your kids, if any
- For you: After 10 years, you don't pay any tax at all on the returns... And in 10 years, this is when I intend to FIRE
It is taxed also only at 30% in the funds for 10 years. My tax rate is the highest.

You shouldn't put all your $$ in there, but that's a nice way of preparing future IMO

[faramund]

I read differently:
Vanguard Aussie shares have returned 7.84% per annum
Inter shares 12.75%

Well, for few reasons:
- For your kids, if any
- For you: After 10 years, you don't pay any tax at all on the returns... And in 10 years, this is when I intend to FIRE
It is taxed also only at 30% in the funds for 10 years. My tax rate is the highest.

You shouldn't put all your $$ in there, but that's a nice way of preparing future IMO

?? I use the data from Vanguard here (https://www.vanguardinvestments.com.au/adviser/jsp/investments/all-products#/etf)

If that link doesn't work - pick display 'performance', and since inception: Aussie shares (9.17), property (15.58), inter (11.11), US shares (15.56).

As to your For reasons: don't have to pay any tax after 10 years?? Do you have a link for this - this seems very odd.

[Grogounet]

https://www.moneysmart.gov.au/investing/complex-investments/investment-and-insurance-bonds

"If you hold the bond for at least 10 years the returns on the entire investment, including additional contributions made, will be tax free subject to the 125% rule."

[faramund]

That's very interesting.

Although, it does say that each year you are taxed at 30% of its gains - so say if the shares make 10% gains each year - you'd end up paying 3% tax each year (but nothing on the capital gains after 10 years if you sold it then - and really the 3% might be reduced by franking credits as well).

In contrast if you hold shares the tax each year is only on its dividends, reduced by the franking credits. So my shares are currently around 5%, and I'm at pretty much 40% tax, so given franking credits of about 30%, I think that works out at 0.5-1% tax a year (but if I sold after 10 years, I'd have to pay 20% capital gains tax on any gains).

So if the annual tax on insurance bonds is reduced by franking credits, then it probably comes down to how large the fees are changed by whoever offers these things.

If it isn't, they might still be worthwhile having some of them, if you do plan to sell off some of them in the future (because of the avoided capital gains).

Definitely, food for thought ...

[Grogounet]

Fees are actually not that great.
It took me a while to figure out this offer at .6% management p.a.
All others are charging a whooping .9% at minimum.

My strategy is to stay with Aussie shares direct and go with investment bonds for international, to avoid the issue you mentioned on franked dividends.

Again, for me, this is also a tool used for estate planning, so that doesn't suit every one.

[faramund]

Although, after thinking about it some more: if you assume the treatment of dividends is the same, and just focus on capital gains. With the investment bond, you are taxed 30% on its capital gains, EVERY YEAR. In contrast, if you hold an ETF, you are only taxed at half of your marginal tax rate IF AND WHEN YOU SELL - which means at most the ETF tax rate is going to work out at around 25%.

So I'm now back to thinking they're probably not worth it - but they're probably not terrible.

[Grogounet]

Still doing some research. You are not taxed on capital gains in the bund.
If fees are aside, a great tool for estate planning, child education or LT investment

[deborah]

I see them as an alternative to super for people who are retiring early, before they can access their super, if they buy the initial stake 10 years before retirement (or when they are going to start using them. Also, since they are tax free after 10 years, even for the funds you put in yesterday, buying a small amount early seems to be a no brainer.