Insurance bonds one of the best tax instruments available

INSURANCE bonds are growing in popularity - unfortunately, it's a sad reality that most Australians (and even some financial advisers) can't get their heads around them. 

This is a great pity because they are one of the simplest and most tax effective investments available. All you have to do is make an investment into the bond and sit back and watch it grow. Then, after you have owned the bond for 10 years you can withdraw all or part of the proceeds free of tax.

They are great for saving tax because, like superannuation, the fund pays the tax on the investor's behalf. If you have money in superannuation the fund itself pays income tax at 15 percent, but your money is tied up until at least age 55. There is also a limit on how much can be contributed to this low tax environment. Insurance bond funds pay a higher rate of tax (30 percent), but there is no limit on contributions and you can access your money at any stage.

Access is a major feature. Your money is not tied up for 10 years and you can withdraw all or part of the balance whenever you wish. If you do withdraw your money early, the profits will be fully taxable, but you will be entitled to a 30 percent rebate to compensate for the tax already paid by the fund. 

A major advantage is that all earnings accrue in the form of bonuses so (unless you cash in the bonds before 10 years have passed) you can ignore them when you prepare your tax return. The benefit of not having to declare any earnings each year makes insurance bonds especially useful investments for people who do not wish their taxable income to be increased by investment income as it may reduce eligibility for child care payments, or the superannuation co-contribution.

Insurance bonds are offered by several fund managers but it's important to seek out expert financial advice to ensure the one you invest in is appropriate for your circumstances.  A major benefit of insurance bonds is that investors can switch between the underlying assets in the fund with no capital gains tax liability at any time. We'll work through some detailed case studies next week.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: