Retire Right 414 Investment bonds: the 125% rule, tax-free access & when to use them
Apr 1, 2026
Martin McGrath, financial adviser specialising in investment bonds and estate planning. He explains how investment bonds work, the 10-year tax-free access rule, the 125% contribution rule and anniversary timing. They discuss using bonds for kids, education funding and high-income cases. Practical topics include fees, fund choices, estate nominations and when bonds beat personal investing or super.
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What Investment Bonds Actually Are
- Investment bonds are a legal structure issued by life insurance companies that hold investments separate from your estate.
- Modern bonds drop the old life-insurance wrapper and offer diversified funds, term deposits and platform-style options with lower fees than historic whole‑of‑life products.
How Bond Taxation Works
- Investment bonds are internally taxed (headline 30%) so earnings are taxed inside the bond and not declared on your personal tax return.
- After 10 bond years withdrawals are tax‑free, and between 5–10 years you get partial discounts; shorter holdings may require declaration with a 30% offset.
Use The 125% Rule To Avoid Resetting Your Clock
- Use the 125% rule to protect your 10‑year tax clock: you can add up to 125% of the previous year's contributions without restarting the 10 years.
- If you exceed 125% the 10‑year clock resets on the full balance, so consider opening a second bond instead of topping an older one.
