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Are investment bonds the new will?

Branded Content Team — Fri, 08 Aug 2025 12:16:00 +1000

This report is sponsored by Generation Life. It was independently researched and written.

As more families find themselves at loggerheads over disputed inheritances, investment bonds can offer a less contentious, more tailored solution for estate planning.

A recent question in the Ask Paul section of Money generated heated debate on the issue of inheritances. The view of many readers was that bequests should be split down the middle. But for plenty of families the picture is more nuanced, and an equal share isn't always the answer.

For Australia's 100,000 blended families and 182,000 stepfamilies, equal - and unequal - inheritances can become a minefield of mixed emotions.

That's not to say inheritance issues are the sole domain of blended families.

In traditional families, it's not uncommon for one adult child to feel they are entitled to a bigger share of an estate because they have spent years caring for ageing parents while a sibling got off scot-free.

Adding to the problem is the fact that people don't always simply sit seething on the sidelines - many take their grievances to court.

Research by investment bond provider Generation Life found that 86% of claims over an estate are brought by the immediate family - adult children as well as current or former partners. And these cases can have a high success rate.

An estimated 74% of contested estates end up being distributed in a way that differs from the original will.

Of course, all these figures assume that a will exists. In fact, as many as three in five Australians do not have a will, a situation that could lead to major legal issues when they die.

What's fanning the flames of family disputes

Previous generations may have squabbled over who would inherit Aunt Ethel's Wedgwood figurines. Today, the stakes are far higher.

The Baby Boomer generation, with its $4.9 trillion in wealth, is expected to pass on about $224 billion annually in bequests between now and 2050.

While there is no suggestion that modern Australians are money grabbers, the high proportion of wills being contested suggests that, for some, the money is worth fighting for.

Given the potential for wills to be a legal minefield, and the sheer scale of wealth to be distributed, it may be time to rethink estate planning.

A report by Generation Life shows that the vast majority of Australians - almost seven in 10 - want to leave a legacy for future generations. The problem is that only 14% have a plan set in place to ensure this happens.

Not only does the desire to leave an inheritance make it essential to plan ahead, it also means careful planning is needed so that your legacy doesn't spark a family feud that has the potential to last
for years.

Options beyond a will

While it seems that many Australians don't have a will, most of us do, however, have superannuation - and our $4.1 billion pool of super savings isn't only used to fund retirement.

A Fidelity survey reveals that three in five Australians plan to leave their super to loved ones when they pass away. Already, up to one-fifth of all super withdrawals are bequests.

But super was never designed for this purpose. Les McGuire, a financial adviser and managing director
of Future Proof Wealth, explains: "Many people have taxable components within their super funds, which means that upon death, the super benefits will be taxed at 17%, resulting in your children receiving less."

There is another option for estate planning - one that is less susceptible to being contested, and without the punitive tax take of super bequests.

The solution can lie with investment bonds.

How investment bonds work

Investment bonds (no relation to government bonds) work much like a managed fund, providing a menu of investment options to select from.

Unlike super, there are no restrictions on when money in an investment bond can be accessed. That said, if you hold onto an investment bond for 10 years, withdrawals are regarded as 'tax paid', meaning they are free of any personal tax.

While there are no caps on the initial sum invested, additional contributions are limited to 125% of the previous year's contributions. Exceed this limit, and you reset the 10-year clock for tax-paid withdrawals.

Dig deeper, and there are aspects of investment bonds that can make them an effective estate-planning tool.

Felipe Araujo, chief executive of Generation Life, explains: "Estate planning is about structuring your affairs so that the right assets go to the right people. Investment bonds bring certainty over the assets that Australians have worked hard to achieve."

Investment bonds are reshaping inheritances

Hamish Clark is a senior financial adviser and director of Choice Capital. He believes investment bonds can play a key role in protecting a person's wishes when it comes to the distribution of their estate. He points to the strength of the Life Insurance Act, which governs investment bonds, that "makes it highly unlikely any disgruntled relatives can mount a successful challenge - something that can be less certain with a will".

The upsides of investment bonds can go further.

Clark notes that today's high rates of separation and divorce make it likely that more Australians will be concerned that their adult children, who may be happily married today, may separate and divorce
or become estranged at some point in the future.

"This brings real concerns that the wealth a person has worked hard to build up could be split across non-family members," says Clark. "Or even go to other current/ex-family members who may have largely abandoned their ageing parents, yet still feel entitled to their wealth."

He adds: "For this reason, I believe that investment bonds, as a non-estate asset, have a significant role to play in estate plans, both today and in the future."

Investment bonds also give older Australians the option to skip a generation altogether. Araujo notes that 80% of inheritances passed down from parents currently go to people older than 50 years. By this time, beneficiaries have often accumulated significant wealth of their own. "In some cases, the inheritance may be small relative to the beneficiary's own wealth," adds Araujo.

He says this is seeing growing interest among grandparents using investment bonds to give their grandchildren a healthy financial start in life, for example, by bequeathing the funds to buy a first home.

"It can ensure a bequest makes a lasting difference," says Araujo.

McGuire believes people of all wealth levels can benefit from holding investment bonds, ensuring their assets are allocated to the desired recipients at the right time and in the right way, tax-free.

He notes also that investment bonds can be used to navigate what may be deeply challenging family circumstances.

"One elderly client of mine sadly has no contact with her grandchildren, but still wants to leave a legacy for them," says McGuire. "By setting up separate investment bonds for each grandchild, there will be complete discretion about the inheritance. In this way, investment bonds have allowed my client to ensure she is remembered by her estranged grandchildren, without fear of legal wrangling that could see her final wishes overruled."

What to weigh up

You don't need much upfront cash to get started with an investment bond. Minimum opening investments can be as low as $1000. If you start small, bear in mind the 125% rule that will limit subsequent contributions. If you wish to add more, the answer can be to open another investment bond.

Investment bonds are known for their tax-efficiency because no tax is payable by the investor provided the investment bond is held for at least 10 years. However, the investment is taxed internally at the company tax rate of 30%, or potentially less after the benefit of franking credits and other concessions.

This makes investment bonds particularly attractive for anyone with a marginal tax rate of more than 30%, though potentially less tax-effective for those on a lower marginal tax rate.

Like all managed investments, investment bonds come with fees. Read the fine print to understand the fees you'll be asked to pay.

Three key pluses of investment bonds for estate planning

Generation Life's Felipe Araujo points to three features that are unique to investment bonds.

1. Certainty - investment bonds sit outside a will

An investment bond nominated in favour of a particular beneficiary is a non-estate asset that cannot be challenged in the same way as a will. Araujo says this provides the upside that "investment bonds bypass probate, ensuring faster distribution of asset".

2. Confidentiality

As investment bonds don't need to go through probate, the proceeds of an investment bond can be paid confidentially.

As McGuire puts it: "No other family member knows who received a particular inheritance." This makes it possible to pass on wealth to a particular beneficiary without raising the ire of other relatives.

3. Control - a direct say in who gets what and when

Araujo explains that an investment bond gives control over "how and when intended recipients can access the money".

For instance, the proceeds of an investment bond can be drip-fed to a beneficiary over a specified period - perhaps years.

This level of control can be a real plus for anyone wanting to provide for the long-term financial needs of, say, children with special needs or adult children who lack experience managing large sums of money.

Why parents are turning to bonds for kids

Ryan Johnson — Wed, 23 Jul 2025 09:58:00 +1000

Micro-investing app Blossom has launched Blossom for Kids, a new feature that allows adults to invest in a professionally managed bond fund on behalf of children.

Once the minor turns 18, they can switch the investment into their name with the permission of the account holder, which can hold up to 10 accounts.

"With Blossom for Kids, we're removing barriers by offering access with minimum investments as low as $5," says Blossom co-founder Gaby Rosenberg.

"Parents can easily establish accounts and track progress alongside their children, turning financial literacy into a hands-on experience."

Does Blossom for Kids charge fees?

Blossom (and now Blossom for Kids) is free to join. There are no fees to open an account or transfer money in or out.

Instead, Blossom makes its money through management fees based on how returns are calculated so you don't get charged directly.

The investor gets the return first (up to 6.50% p.a.), and after that Blossom takes a small cut (up to 1.2% p.a.) to cover fund management and operating costs.

If there's any extra return left, Blossom takes the cut. That helps them top up the fund if returns fall below the target, smoothing things out for users.

The rise of kids' investing apps

The idea of investing for kids isn't new. In today's world of cost-of-living concerns, the housing crisis and climate change, many parents and grandparents want to know how best to squirrel away some money for the future.

While kids can't legally own investments in their own name, parents, guardians or trusts can open accounts on their behalf.

That concept has taken off over the past five years, with micro-investing platforms like RAIZ, Spriggy Invest and SelfWealth offering child-friendly versions of their equity or ETF-based products.

Where Blossom differs is its focus on bonds, a traditionally low-volatility asset class that many retail investors have struggled to access.

Rosenberg says the idea for Blossom came after watching institutional investors pile into fixed income during the pandemic while ordinary Australians were locked out.

"All these other beautiful asset classes had already been democratised through technology or app-based investing. Through the Stakes and Coinbases," Rosenberg told Money in a recent feature.

"We thought, maybe we can take that idea and use it to democratise fixed income, so that it can become an important part of retail investor portfolios."

Why bonds for kids?

On the risk-return scale, bonds typically sit between low-risk cash products and higher-risk equities.

Types of bonds include:

Government bonds, used to fund infrastructure and public programs
Corporate bonds, issued by businesses looking to raise capital
Municipal bonds, from local councils and state-backed initiatives

By investing in a bond, you're essentially lending money to the issuer, and earning regular interest payments (known as "coupons") in return.

The asset class essentially aims to provide predictable income without too many ups and downs in capital value.

"This may make it a suitable long-term holding for the type of activities that resonate with both parents and children - such as funding education, first-home deposits, gap years, holidays or just building savings from a child's own efforts," says Rosenberg.

Still, it's worth comparing returns.

The app's accounts, Blossom Save and Blossom Plus, currently target 5.45% p.a. and 6.50% p.a. respectively. That's often below the average returns for most equities; the 10-year average return of the S&P/ASX 200, which sits at 8.70% according to BlackRock.

But the trade-off is less volatility and consistency.

Teaching money the slow and steady way

Beyond the returns, Rosenberg believes bonds can help close Australia's financial literacy gap, particularly for kids.

Around 8.5 million Australians (45% of the population) are considered financially illiterate, according to the HILDA survey.

That's based on just three basic concepts: understanding compound interest, inflation, and diversification.

"Bonds, with their slow and steady growth, help instil the importance of patience and the rewards of disciplined investing," she says. "It's a much gentler - and safer - introduction to the financial world than the often wild ride of cryptocurrencies or speculative stocks."

What's more, Rosenberg says this hands-on experience with bonds can boost a child's financial confidence and provide the perfect springboard for understanding more complex investments down the track.

What are the risks?

No investment is risk-free, and fixed income has its own vulnerabilities.

Blossom says rising interest rates, inflation and the potential for issuers to default on payments to investors are among the biggest risks in fixed income.

"But a competent fixed interest fund manager can build portfolios that help weather those risks producing optimal outcomes over time," Rosenberg says.

Consumer Finance Awards 2025: Investment Bond Provider of the Year

Money Team — Tue, 01 Jul 2025 14:34:00 +1000

Generation Life has been named Money's Investment Bond Provider of the Year as part of the 2025 Consumer Finance Awards.

A stable of investment bonds - to save for funerals and major expenses, such as a child's education, as well as its popular LifeBuilder - that offers significant estate planning features has helped Generation Life win for the fourth consecutive year.

Here's how the investment bonds work.

Investors purchase investment bonds (once called insurance bonds), which are a single premium life insurance policy, with after-tax money. The life insurance company pays tax on the investment earnings.

The tax rate is 30%, a decent saving for investors on high marginal tax rates of 45% or even 37%. The 30% tax rate on Generation Life's growth investment options can be brought down to 12%-15% by offsetting capital losses against income as well as using franking credits.

For investors to receive the maximum tax benefits, it is best to hold an investment bond for 10 years, making it a long-term investment.

Generation Life has attracted the attention of financial planners and families, explains Felipe Araujo, chief executive officer of Generation Life, and manages $4 billion in funds and offers 69 different investment options across all the major asset classes including diversified funds and single sector funds.

Investment bonds offer some unique estate planning features. A bond can be structured as a non-estate asset, so it doesn't have to be a part of a person's estate or included in a will. It can also bypass probate and can be paid out more quickly before probate is granted. It is regarded as a tax paid investment and there is no tax impact with a death benefit even when it is bequeathed to a minor.

Araujo says one in five Australians wants to pass a legacy onto their grandchildren and investment bonds allow the bond holder to nominate a future beneficiary, such as a grandchild, so that the assets will transfer to them.

"You're transferring assets very smoothly between generations," says Araujo.

This feature is attractive for blended families or those with conflicts between family members. By targeting specific family members, families can avoid their wealth ending up in a marital pool because they are worried that their adult children may split up with their partner.

"One of the benefits of an investment bond is that you don't have to distribute to the beneficiary," says Araujo. In contrast, a family trust distributes the income that the assets are generating every year to different beneficiaries, even in years that the beneficiaries may not want or need the income.

With an investment bond, however, the gains can be reinvested automatically and internally within the structure of the investment bonds on behalf of policy holders. Investment bonds can be held in an investor's personal name rather than in a trust.

Why they won

Estate-planning features for families who want to control when distributions are paid and preserve their wealth for their own descendants

How to find the best investment bonds in Australia

Money Team — Mon, 26 May 2025 14:48:00 +1000

If you're looking for a tax-effective way to invest in Australia, investment bonds could be a great option.

While they may not be as widely discussed as popular investment options, like shares or property, they can deliver impressive results, blending tax efficiency, flexibility and long-term wealth-building potential all in one.

Here, we explore what to consider when browsing some of the best investment bonds in Australia, how they work and their key benefits.

What are investment bonds?

Investment bonds, also known as insurance bonds, are a type of investment product offered by life insurance companies and financial institutions.

They combine the features of investments and life insurance, allowing investors to contribute money to a professionally managed portfolio.

These portfolios may include a mix of assets such as equities, property, fixed interest and cash.

How do investment bonds work in Australia?

Investment bonds work similarly to managed funds, with one significant difference: the tax treatment.

When you invest in an investment bond in Australia, the earnings are taxed at a maximum rate of 30% within the bond itself. This makes them a tax-effective alternative for high-income earners.

Here's how they operate:

Initial investment and additional contributions: You can start with a lump sum investment and, in most cases, add up to 125% of the previous year's contribution annually.
Tax efficiency: The bond provider pays tax at 30%, and if you hold the bond for at least ten years, withdrawals after this period are tax-free.
Flexibility: You can choose from a variety of investment options within the bond, such as conservative, balanced or growth portfolios.
Withdrawal options: While investment bonds are designed for long-term investment, you can withdraw funds early, but tax implications may apply.

Four core benefits of investment bonds

Investment bonds in Australia offer several advantages for investors, making them a top choice for those seeking long-term financial growth. They include:

1. Tax benefits

One of the key attractions of investment bonds is their tax structure. Since the bond's earnings are taxed at 30%, they can be a tax-effective option for those in higher income brackets (who would otherwise be taxed at up to 47%). After ten years, any withdrawals are tax-free, provided the bond has not been cashed out early.

2. Wealth planning and estate benefits

Unlike direct shares or managed funds, investment bonds allow for smooth estate planning. Since they include a life insurance component, they can be set up with a nominated beneficiary. This means that, upon the investor's passing, the proceeds can be paid directly to beneficiaries without going through probate.

3. No ongoing tax reporting

Since the tax is handled within the bond, investors do not need to report earnings in their annual tax returns, reducing the complexity of tax filings.

4. Disciplined investing

Investment bonds encourage long-term investing due to their tax incentives, making them ideal for education savings, retirement planning or wealth accumulation.

Some of the best investment bonds Australia offers

When looking for the best investment bonds Australia has, consider factors such as performance, fees, investment options and the reputation of the provider. Some of the top investment bond providers in Australia include:

Australian Unity - Offers a range of diversified portfolios for long-term investors.

Centuria Life - Provides a flexible and tax-effective investment bond solution.

Generation Life - Known for its strong investment options and wealth management solutions.

Foresters Financial - Offers tax-efficient investment bonds suitable for various financial goals.

Before choosing an investment bond, it's important to assess your financial objectives and compare the fees, investment choices and additional benefits each provider offers to ensure you select an asset that aligns with your investment objectives and risk tolerance.

Managed funds as an alternative

While investment bonds provide tax advantages and estate planning benefits, managed funds can also be a good alternative for those seeking diversified investment opportunities. Unlike investment bonds, managed funds do not have a 10-year tax incentive but may offer more flexible investment options.

Of course, if you're unsure whether investment bonds or managed funds are the right choice, speaking to a financial advisor may help determine the best strategy for your needs.

Start learning more about investing with Money

Investment bonds in Australia can be a fantastic long-term investment option and, when utilised effectively, can play a crucial role in your wealth-building strategy. At Money, we are committed to ensuring everyday Australians make smarter decisions with their finances, from their choice of investment to home loan lender.

If you're interested in learning more about how investment bonds work in Australia or other investment opportunities, check out the Money Learning Hub. It's jam-packed with expert insights and financial tips to help you make informed decisions.

Blossom: The Aussie twins behind a popular investing app

Tom Watson — Fri, 16 May 2025 10:32:00 +1000

Ali and Gaby Rosenberg know just how special bonds can be.

After all, as co-founders of the fixed-income investment platform Blossom, they are literally in the business of bonds.

The two also share a bond that most people don't.

The twin thing

They're sisters and they're also both twins - though not with each other. Ali, who is the oldest of the four Rosenberg siblings, has a twin sister.

As does Gaby, who is the youngest of the four sisters.

"For a long time, we didn't know of any other family who had two sets of twins except Roger Federer," says Gaby.

"But he has one set of girls and one set of boys, and we're all girls.

"Since then, I've actually met a couple of families that also have two sets of twin girls, which is exciting."

Despite the rarity of their dynamic, both say that life growing up in Sydney in a family with two twins was pretty normal. It was all they knew. There were one or two quirks, though.

"For simplicity, our parents used to be like, number one daughter, number two daughter, number three daughter, number four daughter," recalls Ali.

So, what made two sisters - who, at the time, were both in their twenties - want to start an investment platform focused on fixed income? An asset class that is, perhaps unfairly, stereotyped as being a bit... boring.

Ali Rosenberg co-founded the Blossom investing app with sister Gaby.

Family finances

To rewind, Ali and Gaby grew up in a family that was heavily involved in the finance industry.

That's not to say that they were avidly discussing bonds as teenagers, though. Far from it.

"We come from a long line of finance professionals. So, our dad, cousins, uncles, grandparents - everyone was in finance. Still, we weren't so interested until university," says Gaby.

Ali studied finance, while Gaby studied commerce. From there, Ali started forging a career in venture capital and fintechs, while Gaby was involved in start-ups.

Then came COVID. As the pandemic began to take hold, Ali and Gaby found themselves living under the same roof again.

But rather than fixating on sourdough starters or cocktail classes, Gaby remembers being absorbed by what was going on in the sharemarket and how the big end of town was reacting.

"The market had crashed, and the crypto bubble had burst. So, we were just watching what all the institutional and high-net-worth investors were doing with their money. They were basically liquidating all their risky stuff and moving it into fixed income.

"We were looking to do some fixed-income investing ourselves, just to try to get on top of our finances. But we couldn't gain access to anything. All the retail guys were left behind because the fees were so high and there were these huge barriers to entry."

Democratising investing

That's where the idea of Blossom came from - the idea of providing regular Australian investors the same access to fixed income as institutions or the super wealthy.

"All these other beautiful asset classes had already been democratised through technology or app-based investing. Through the Stakes and Coinbases," says Gaby.

"We thought, maybe we can take that idea and use it to democratise fixed income, so that it can become an important part of retail investor portfolios."

Coming up with the idea was one thing. Bringing Blossom to life was where the real challenge lay. As Gaby recalls, the journey started with an extremely long to-do list.

"Financial services in Australia are obviously extremely regulated, so we had to make sure that we were getting the foundations and the structure of the products correct before we started moving on anything.

"So, one, was incepting the business. Two was working out who's going to run the fund and manage the money. Then it was what licensing do we require? Who's going to build the app and our back end? Who's going to do all the legal and compliance? And on and on and on."

As the pandemic rumbled on, Gaby jumped in full time to get Blossom off the ground, while Ali pitched in at night and on weekends, designing product screens and putting together their strategy.

Just under a year after having the idea, Ali and Gaby launched Blossom in June of 2021. Three months later they had already reached $10 million in funds under management.

Those early days weren't a cakewalk, though. Looking back, Gaby says there were two major challenges: earning trust and explaining fixed income.

"It was hard to go into meetings with $5000 under management as two young women who didn't have a long track record. The trust anchors aren't really there. So, you just have to chip away until you're like, 'Oh, we're actually at $10 million now. And now we're at $50 million.'

"The second one is that fixed income is just a less popular asset class in Australia. So, trying to educate people on fixed income and then sell the product was - and is - challenging."

"Our late grandfather Bert's nickname from his mum was Blossom," says Blossom co-founder Gaby Rosenberg.

How Blossom works

It's fair to say that a lot of the focus in the investment world is on the likes of tech stocks and crypto. That fixed income doesn't get much limelight. Gaby is a big believer in the role that bonds and fixed income can play, though, especially in times of turbulence for other asset classes.

"As we can see, there's extreme volatility in the market at the moment. But markets are always volatile because there's always something else happening.

"Equities will be volatile for certain reasons and then fixed income will be volatile for totally different reasons. So, diversity just means that if you have a little bit of everything in your portfolio you can manage risk a bit better."

For everyday investors looking to add fixed income to their portfolio, Blossom's pitch is pretty simple. Individuals can pick between two investment products: Blossom Save (which currently targets a 5.70% return) and Blossom Plus (which targets 6.75%).

The underlying Blossom Fund, which is managed by Fortlake Asset Management, includes a diverse range of fixed-income investments, such as corporate and government bonds.

"We're trying to democratise fixed income," says Gaby. "So, what we've done is create the Blossom App which provides access to our bespoke fixed income fund called the Blossom Fund.

"Our whole mission is to try and remove as many barriers to entry as possible. So, $5 minimums in Blossom Save. No sign-up, transfer or withdrawal fees across both products. And we post earnings to your account every single day."

Blossom is about democratising fixed income investing, says co-founder Gaby Rosenberg.

If the fund makes more than the target return - which is paid out to investors - and there's any money left over after paying fees, that's when the business makes money.

Blossom isn't just for retail investors, though.

Both sisters collaborate on managing the Blossom team and high-level strategy, but Gaby looks after the consumer side of the business, while Ali focuses on self-managed super funds, trusts and businesses - even charities.

"One area which has become a really interesting focus for us is the not-for-profit space. You've got charities that need to de-risk their portfolios because of the volatility in the market," explains Ali.

"They need that stability and that consistent return to know that they are going to be able to fund their programs in the future and have confidence in the money that they've already received."

A family business

There's an idea that you shouldn't go into business with family or friends. And for many, that's sage advice. Not for Ali and Gaby, though.

Nearly four years from launch, Blossom has 25,000 customers and more than $109 million in funds under management.

"When people talk about having to find a co-founder or starting a business with a co-founder, they have to go through this dating-like period to understand if they're going to work well together and to make sure that trust is there," says Ali.

"We didn't need to do any of that. We just knew that the trust element was there and that our interests were aligned."

On top of that, Ali says that as the oldest and youngest siblings, there's a dynamic at play between her and Gaby that drives them.

"I'm number one and Gaby is number four. I'm the oldest, so I think, deep down, I inherently want to make my younger sister proud. She's the youngest, so she wants to make her older sister proud.

"I think that just gives us this little drive to make sure that we're delivering something awesome - something we want to feel great about it."

That's not to say that there aren't challenges that come with working together. But those are more for the rest of the family, rather than Ali and Gaby themselves.

"The challenge is probably just talking about work too much when it should be family and personal time. So, we get in trouble from our mum and sisters who aren't involved in the business. But they just roll their eyes and move on to have their conversation at the corner of the table."

How Blossom got its name

As co-founders and leaders, Ali and Gaby are clearly the driving force behind the business. But in many ways, Blossom is a family affair. Even down to the name.

"Our late grandfather Bert's nickname from his mum was Blossom," says Gaby.

"He passed away from pancreatic cancer in April 2020, which is right before we started. And now through our referral program we donate money to the Garvan Institute for pancreatic cancer research.

"He was a huge family guy, and I think a lot of his personality flows through the business.

"So, Blossom really brings all our family together, which is beautiful. Everyone contributes wherever they can."

How to buy government and corporate bonds

Money Team — Tue, 04 Feb 2025 14:31:00 +1100

High-quality bonds are one of the leading defensive assets for retail investors, lauded for their capital preservation qualities.

But what exactly are they and how do you buy them?

Bonds are essentially loan contracts issued by either governments or companies.

You loan them the money and, in exchange, you'll receive coupon payments (yield) and, at the end of the agreed term, the initial loan amount (face value) of the bond.

Because they're issued by governments or large companies, they're considered a safe asset, second only to cash. Australian government bonds are AAA rated, the top credit rating, so creditors - in this case, you - will almost certainly be paid.

For this reason, bonds have fixed-income stalwarts.

How government and corporate work

Investors can hold bonds until they mature or sell them before this point on the secondary market.

Their price on the secondary market is a combination of the bond's face (par) value and the demand for it in the secondary market, which will add a premium or discount.

The demand for a bond on the secondary market is influenced by its duration, which is a measure of a bond's interest rate risk.

The duration measurement takes into account the bond's maturity, yield, and the coupon payments left to be paid out.

Source: PIMCO

Bonds are therefore more or less affected by the interest rate environment depending on their duration.

If interest rates go up, the bond will trade at a discount because newly issued bonds will pay investors higher coupon rates than old ones, and vice versa. The higher the duration, the more sensitive the bond will be to changes in interest rates.

How to buy government and corporate bonds

Government bonds can be bought and sold on the ASX as exchange-traded treasury bonds (eTBs), and they are traded in the same way as regular stocks.

Corporate bonds can be purchased directly from the issuer through a public offer at face value.

You can also trade them on the secondary market via the ASX, where they're called XTBs.

Another option is to invest in a professionally managed bond fund, which pools investors' money in order to purchase a collection of bonds.

It's important to remember that managed funds typically have management and sometimes performance fees.

Bond ETFs, which passively track bond indices, are a cheaper way to gain diversified exposure to the bond market. Betashares, ETF Securities, iShares, Vanguard and State Street all offer bond ETFs.

Should you invest in bonds in 2025?

Ryan Johnson — Wed, 06 Nov 2024 12:22:00 +1100

With the rise of micro-investing platforms, investing in assets such as equities and crypto has never been easier.

Young investors flocked to these high-risk, high-reward markets, often leaving fixed-income assets like bonds out of their portfolios.

In retrospect, this was likely a savvy approach; high-risk assets produced solid returns for much of this decade. Conversely, bonds-historically a safe bet-experienced steep losses during this period.

But now the market is changing, and the old rules and strategies are starting to make sense again.

As we look ahead to 2025, bonds appear ready for a comeback, and this time, new methods for accessing them are helping investors of all backgrounds get involved.

Here's why bonds could be a smart play for the year ahead.

Do bonds have high volatility?

For a stable asset, bonds have had a volatile few years.

Throughout the centuries, wealthy investors have relied on bonds to steady their portfolios, particularly in turbulent times. But as inflation and interest rates surged due to the COVID-19 pandemic's economic impact, bond values took a hit.

This culminated in the worst year on record for bonds in 2022, with the Bloomberg Aggregate Bond Index (the Agg)- a global bond market benchmark tracking over US$50 trillion - falling 11%.
To put this in perspective, the Agg has only fallen five times since 1976.

In Australia, bonds dropped over 9% in 2022, making even cash, a traditionally low-return asset, more profitable in comparison.

Now the economy looks different.

The Agg has returned an average of 2.25% over 2024 to September, modestly up from 2% increase the year before. And while that's not an eye-watering rate of return, bonds began to serve its function again in investor's portfolios.

Inflation has settled to 2.8% in Australia, its lowest since early 2021, and calls for interest rate cuts are getting louder.

Globally, economies like New Zealand, Canada, the UK, and the US have already begun easing rates, with the Reserve Bank of Australia (RBA) being seen as a laggard compared to its central bank peers.

With calmer markets and declining rates, the dust has settled, and 2025 is shaping up as a strong year for bonds.

What is the relationship between bonds and interest rates?

To see this opportunity, it helps to understand the inverse relationship between bonds and interest rates. Generally speaking, when rates go up, existing bonds lose value, and when rates fall, bond prices rise.

Here's why: Most bonds pay a fixed interest rate, so when new bonds come out with higher returns in a rising-rate environment, existing bonds locked in at lower rates look less attractive.

Their prices drop to compensate. But when rates fall, bonds with higher fixed rates become more valuable since they offer a better return than new, lower-rate bonds.

How do bonds work?

Suppose you bought a bond last year with a 4% fixed rate, earning $40 annually on a $1000 investment. If rates rise and new bonds offer 6%, your 4% bond looks less appealing, so its price may fall to about $940 to raise its effective yield closer to 6% when sold.

If rates drop and new bonds yield only 2%, demand for your 4% bond rises, pushing its price up to around $1060.

Even though the interest remains $40 guaranteed if held it to maturity, the bond's higher price adjusts its yield closer to the new, lower market rate.

With the likelihood of rate cuts in 2025, these dynamics suggest bonds may be ready for a comeback.

How can I invest in bonds?

One of the most exciting changes in the bond market today is how digital platforms are making bonds accessible to a broader audience.

Blossom, a micro-investing app, stands out in this movement, bringing bonds - traditionally reserved for high-net-worth individuals and institutions - within reach of everyday investors.

"At Blossom, we're seeing a healthy interest in fixed income, especially among young investors," says Blossom CEO Gaby Rosenberg, who, at only 24 years old, founded the platform to give Australians easy access to this asset class.

"It offers a dependable way to diversify while minimising exposure to market downturns."

Of course, there are many other well-regarded institutions, usually exchange-trade bond funds or managed funds, which give retail investors access to the bond market.

There are also many types of savings vehicles, such as property bonds or investment bonds, which operate in unique ways.

Bonds can be a complicated asset class so it's best to do your research and consult the experts.

Should you invest in bonds in 2025?

While falling interest rates might spell good news for most investors, before it happens, it might be the right time to take stock of your portfolio.

The world is changing, with the US presidential elections, climate change, and conflicts in the Middle East and Ukraine all presenting ongoing risks to investors.

No one knows what the stock market will do, nor when the next black swan event will come along and flip the script.

A diversified portfolio needs ballast - an effective way of balancing the risk and reward, and Rosenberg says bonds can be this safety net in turbulent markets.

"For many, fixed income will always be a part of their investment strategies, especially as interest rates continue to stabilise," she says.

"Its role in a diversified portfolio is not only about reducing volatility but also about ensuring investors are not overly exposed to any one asset class."

Friends With Money #175: Protecting your portfolio

Tom Watson, Marc Jocum — Wed, 30 Oct 2024 01:00:00 +1100

With inflation falling and interest rates starting to do the same, is now an opportune time to consider investing in fixed income or has the window passed?

This week on the Friends With Money podcast, Money's Tom Watson is joined by Marc Jocum, product and investment strategist at Global X ETFs, to chat all things fixed income. They discuss:

The assets included in the fixed income basket
How bonds deliver returns to investors
The benefits of having a fixed income allocation
How fixed income assets are affected by interest rates
The pros and cons of investing in fixed income now

Listen to this episode of Friends With Money

Subscribe to Friends With Money

Order your copy of the Consumer Finance Awards special issue

Friends With Money podcast FAQ

What is the Friends With Money podcast?

Where can I listen to the podcast?

You can listen on Apple Podcasts, Spotify, or YouTube (with closed captions available).

Who hosts Friends With Money?

Episodes are hosted by Vanessa Walker and Tom Watson from Money magazine, featuring expert guests and real conversations about money.

Is the podcast suitable for beginners?

Yes! It's designed to be accessible for beginners while still offering valuable insights for seasoned investors.

What topics does the podcast cover?

The Friends With Money podcast covers topics including banking, property, budgeting, superannuation, investing, saving, insurance, employment, travel and more.

How often are new episodes released?

New episodes are released weekly, so you can stay up to date with the latest financial tips and trends.

Can I watch episodes with captions?

Yes, full episodes with closed captions are available on YouTube.

Why subscribe to the Friends With Money podcast?

Subscribe to the Friends With Money podcast today and start learning when it suits you.

Your beginner's guide to investment bonds

Chloe Walker — Tue, 06 Aug 2024 13:34:00 +1000

Think investment bonds are in the same family as corporate or government bonds? Think again.

Unlike traditional government or corporate bonds that promise a fixed return, investment bonds are something entirely different.

This guide will break down what investment bonds are, who they suit, and how you can invest in them.

What are investment bonds?

An investment bond is a financial product that combines features of both life insurance and investments. Think of it as a container for your investments, akin to a superannuation fund or family trust. Within this structure, you can choose from various investment options, such as equities, property, and fixed interest.

The "bond" part of the name refers to the relationship between the policy owner and the life insured, governed by the Life Act.

"Just like superannuation, investment bonds are tax-paid investments, meaning all the taxing is done and paid within the investment bond itself and doesn't form part of your personal tax return," says Felipe Araujo, Generation Life's general manager of sales, marketing, and operations.

"The provider of the investment bond handles the taxation of earnings at a flat rate of 30%."

Investment bonds allow withdrawals without age-based limitations, and investors can withdraw some or all of their investments at any time.

"If you hold the investment bond for at least 10 years, you can withdraw the earnings tax-free, making it a tax-efficient investment vehicle," says James O'Reilly, founder and financial adviser of Northeast Wealth.

However, O'Reilly notes that an important aspect to understand about investment bonds is the 125% rule.

This rule states that in any given year, you cannot contribute more than 125% of the amount you contributed in the previous year without resetting the 10-year period required to make your earnings tax-free.

"If you exceed this limit, the 10-year clock starts again, which can significantly diminish the value of your investment bond," O'Reilly explains.

Who are investment bonds suitable for?

High-income earners: For individuals with high incomes, the tax payable on an investment bond is lower compared to what they would have paid if the investment was in their own name. According to O'Reilly, high-income earners might face tax rates as high as 47%. In contrast, am investment bond taxed at 30% would result in much better tax outcomes for them.
Anyone focused on estate planning: Unlike assets distributed through a will, which can be contested and a long take time to settle, the beneficiary nominations in an investment bond are legally binding and can be settled quickly-often within seven working days.
Young families: Investment bonds are also suitable for young families who are saving for home ownership or education.

What are the cons?

Complexity: Understanding the structure and benefits of investment bonds can be challenging. There are a number of different tax considerations and contribution rules, which can be complex.
Higher fees: Investment bonds may have higher fees compared to other investment options. However, O'Reilly notes that exciting new products are driving fees down. "We could be looking at the golden years for investment bonds," he says.
Illiquidity: Accessing funds before the 10-year period can result in additional taxes. Early withdrawals are taxed on a sliding scale, so a long-term investment horizon is best.
Better alternatives: ProSolution Private Clients owner and director Stuart Wemyss says he rarely recommends investment bonds due to the availability of more effective and flexible alternatives, often at lower costs. "A holistic, long-term financial plan often reveals better options," he says.

How do you buy investment bonds?

Purchasing an investment bond is straightforward. They can be bought through a financial adviser or directly from companies such as Generation Life or Australian Unity, with a minimum investment of $1000.

"Anyone can start them with a fairly low contribution amount, even as low as a few thousand dollars," O'Reilly says.

"However, again, it's important to be aware of the 125% rule to avoid restarting the 10-year period."

To sum things up

Investment bonds are a powerful tool for tax-efficient investing and estate planning, offering stability under the Life Act.

However, they can be complex, and it's essential to understand their potential drawbacks.

"Although they're a fantastic product, there are a couple of little traps that can diminish the value of your investment bond significantly," O'Reilly says.

"Financial advice can help navigate the complexities of tax implications and contribution strategies, ensuring that the investment bond aligns with your long-term financial goals."

Money's 2024 Investment Bond Provider of the Year

Money Team — Tue, 23 Jul 2024 09:51:00 +1000

Generation Life has been named Money's 2024 Investment Bond Provider of the Year as part of the Consumer Finance Awards.

There are only a few tax-effective investments on offer in Australia and one of these is investment bonds.

Winning for the third year, Generation Life manages $3.2 billion of investment bonds and offers features such as 69 different investment options across all the major asset classes including diversified funds and single sector funds.

While Generation Life has popular investment bonds to save for funerals and children's milestone expenses, such as education, it is the estate planning and tax-optimised features of its LifeBuilder investment bonds that are catching the attention of financial planners and families.

Grant Hackett, chief executive of Generation Life, points out that an investment bond can be structured as a non-estate asset, so it doesn't have to be a part of a person's estate or included in a will.

Hackett describes it as a "really cost-effective testamentary trust where you can control distributions and vesting periods when people receive money from the bond".

Investment bonds are attractive for families who have built up several assets, such as a house, superannuation and other investments, who don't want their hard-earned assets ending up in the marital pool that can be split if the relationship between their kids and their partners break up.

"It's great for situations around high-conflict families or blended families or kids from a previous relationship, particularly when there is a lot of money that they could fight one another over," says Hackett.

Hackett says families can set up investment bonds so that the distributions are managed even when the parents or grandparents die.

"So, you can design it and distribute those funds with certainty, what we call from the grave."

Hackett says the tax-optimised investment bonds are Generation Life's "big ticket item". Investors purchase investment bonds, which are a single premium life insurance policy that were once called insurance bonds, with after-tax money.

The life insurance company pays tax on the investment earnings. The tax rate is 30%, a decent saving for investors on high marginal tax rates of 45% or even 37%.

The 30% tax rate on 26 of the growth options can be brought down to 12-15% by offsetting capital losses against income as well as franking credits.

In order for investors to receive the maximum tax benefits, it is best to hold an investment bond for 10 years, which makes it a long-term investment.

Higher bond yields could spell trouble for the tech sector

Dan Miles — Fri, 15 Mar 2024 13:45:00 +1100

US share markets have raced ahead in 2024 led by Nvidia and the strong performance of technology shares.

Gains have come despite a rise in long-term bond yields and investors need to be cautious in the months ahead as share prices could disappoint if yields keep on climbing and rate cut expectations keep being pushed out, which could put a brake on market confidence.

Strength in the US share market has been fuelled by the boom in technology stocks linked to the creation of artificial intelligence (AI) and the winding back of expectations that the US economy will fall into recession.

Nvidia has been the stellar beneficiary of the AI rally as its computer chips power AI processing. However, other companies have also dominated headlines, including Microsoft after it overtook Apple as the world's largest company earlier this year, more closely linked as it is to AI than the iPhone seller.

However, in terms of valuations, Innova uses a composite of four valuation metrics which show the S&P500 is currently trading on valuations only seen twice before since 1995: in 2021 and 2000.

The S&P500 is currently trading at a significant premium to its 25-year average, and is currently higher than the peak of the GFC - yet not quite as high as it reached in 2021 or the 2000 tech bubble. The Nasdaq is not yet trading at the extremes of the 2000 tech bubble, but it is trading on rich valuations compared to history.

At these valuations, even with robust economic growth, the price being paid for US shares has always ended badly from this point, both for the S&P500 and the Nasdaq. Share markets are still very vulnerable to a fall and investors need to be careful of buying into the euphoria at a cost that can't be recouped.

However, given the concentration of this rally there are plenty of other sectors that are more reasonably priced.

With inflation receding and the likelihood of US recession falling, we would expect that the concentration of the rally should broaden to other areas if this is a true rebound in market and economic activity.

Areas typically considered 'cyclical' do very well in an economic rebound, and if the US can engineer a soft landing, cyclical areas should be likely beneficiaries - as well as other areas in the AI value chain as competition increases for market share.

Much of the recent euphoria has been related to expectations of cuts in interest rates in the US and other developed economies.

After reaching multi-decade highs in 2022, inflation amongst most developed market economies appears to have peaked. Given this normalisation of inflation, financial markets have been pricing in multiple interest rate cuts by the US Federal Reserve and other central banks this year.

However, it is possible that strong economic fundamentals and corporate earnings in the US could reduce the impetus for the US central bank to cut interest rates and interest rates could stay higher, for longer.

Central banks will not want to reignite inflation by cutting interest rates too early, particularly with the US Government running account deficits of 7%-plus, offsetting the restriction coming from higher rates. That's why we think financial markets have gotten ahead of themselves on rate expectations; rate cuts may not come as quickly as financial markets think.

Indeed, if economic growth remains robust, this could put a floor under inflation and bond yields could potentially rise further, which could lead to lower stock valuations in the US and elsewhere.

While there has been no build-up in risk in debt markets as there was with the 2008 global financial crisis or the dot.com tech crash of the late 1990s, US tech stocks and share markets overall are still vulnerable to the rising cost of credit and higher rates.

Higher real rates indicate that borrowing costs are rising faster than inflation. This can have a ripple effect on economies by reducing investment and business activity, slowing down consumer spending, and leading to a potential slowdown in economic growth in the US and in Australia.

Rather than expensive technology stocks, we believe that there are plenty of safer places for investors to park their money. We have adopted an overweight position in cash and bonds in case of further turbulence or market volatility - however as the likelihood of a recession has fallen, we have reduced this and redeployed capital to equity markets we think look attractive.

While we are still underweight equities overall, we believe there are areas of the market that could provide higher upside potential if things go well, but also offer less downside exposure if something unforeseen were to happen and equity markets corrected.

This should help offset the equities underweight position if the thesis plays out - it includes allocations to Australian shares, Asia, Value-style equities and higher-quality small companies.

If global economies remain somewhat robust, these areas aren't yet priced for an economic or market rebound and so likely possess greater upside potential as their future earnings are not yet factored into their price.

On the other hand, if rate cut expectations in the US get pushed out far enough that it causes a deterioration of market multiples and consumer confidence, whilst they won't be immune from market falls, their price means they have a margin of safety and should fall less than areas more richly priced.

Friends With Money #129: Unlocking the profit of fixed income

Michelle Baltazar, Alex Moffatt — Wed, 13 Dec 2023 01:00:00 +1100

Back by popular request! You wanted to know more about bonds and how to unlock the profit of fixed-income assets - and we deliver!

This week on the Friends With Money podcast, Money's Michelle Baltazar chats with Alex Moffatt, director at Joseph Palmer and Sons, about the benefits and profit of adding bonds to your portfolio.

Back to basics
Bonds are back in the black
Is there an easy way to invest in bonds?

Listen to this episode of Friends With Money

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Friends With Money podcast FAQ

What is the Friends With Money podcast?

Where can I listen to the podcast?

You can listen on Apple Podcasts, Spotify, or YouTube (with closed captions available).

Who hosts Friends With Money?

Episodes are hosted by Vanessa Walker and Tom Watson from Money magazine, featuring expert guests and real conversations about money.

Is the podcast suitable for beginners?

Yes! It's designed to be accessible for beginners while still offering valuable insights for seasoned investors.

What topics does the podcast cover?

The Friends With Money podcast covers topics including banking, property, budgeting, superannuation, investing, saving, insurance, employment, travel and more.

How often are new episodes released?

New episodes are released weekly, so you can stay up to date with the latest financial tips and trends.

Can I watch episodes with captions?

Yes, full episodes with closed captions are available on YouTube.

Why subscribe to the Friends With Money podcast?

Subscribe to the Friends With Money podcast today and start learning when it suits you.

Friends With Money #117: Bonds - the fixed income alternative

Tom Watson, Gaby Rosenberg — Wed, 20 Sep 2023 01:00:00 +1000

After a woeful 2022 bonds appear to be making a comeback with investors. But how do they work, and what role do they have in a portfolio?

This week on the Friends With Money podcast, Money's Tom Watson is joined by the chief executive of micro-investing app Blossom, Gaby Rosenberg, to drill into the fundamentals of fixed income and bonds.

What do we mean by fixed income?
What factors influence the price of bonds?
How have bonds performed in the short and long term?
What role can fixed income play for investors?
How can investors purchase bonds?

Listen to this episode of Friends With Money

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