Unlike superannuation, where personal contribution amounts are capped and subject to penalty tax rates if exceeded, investment bonds give you much greater flexibility on how much you can contribute to your investment each year.
With an investment bond there are no restrictions on the maximum value of the investment, unlike superannuation where a balance cap might limit your ability to make additional contributions.
Making additional contributions
With an investment bond, there are no limits on the amount you can invest in your first year of investment. Your first investment year starts on the day your bond is established. Each subsequent investment year, additional contributions of up to 125% of the previous year’s contributions can be made without re-setting the 10-year period. Those additional contributions benefit from being treated (for tax purposes) as if they were invested at the same time as your initial contribution. This means these additional contributions don’t have to be invested for the full 10 years to be included as part of the 10-year period.
What is the 10-year period?
If you invest in an investment bond for at least 10 years, your growth on the entire investment, including additional contributions, will be tax paid, and withdrawals after the 10th anniversary will be free of any personal tax, in your hands.
Effectively managing the 125% opportunity
It’s important to remember that if you don’t make an additional contribution in a particular investment year, then making an additional contribution in any subsequent investment year will restart the 10-year period. If your contributions in an investment year exceed 125% of the previous investment year’s contributions, your 10-year period will also re-start.
If you want to make additional contributions above 125% of the previous year’s but do not want to re-set the 10-year period on your investment, you could instead start a new investment bond.
Automatically increase your investment
Alternatively, setting up an investment bond with a regular savings plan and the ability to automatically increase the regular savings amounts can provide a simple and effective way to take advantage of the 125% opportunity.
Client example
Initial contribution: Jenny started her LifeBuilder investment on 1 March 2019 (this is the initial start date) by investing $10,000 and does not make any further contributions for the rest of her investment year.
Making an additional investment: In her second investment year, Jenny starts a regular savings plan and contributes $5,000 in that year. Jenny could have contributed up to $12,500 in that year ($10,000 x 125%). Jenny continues to make regular $5,000 contributions each investment year.
Maximising the 125% opportunity: In June 2023 (investment year 5), Jenny wants to maximise her contributions for that investment year and invests an additional $1,250 (on top of her regular savings amount of $5,000). This means she has contributed $6,250 for that investment year ($5,000 x 125%).
