What it is Imputation bonds combine the taxation benefits of traditional insurance bonds with the investment menu of a master trust. The upshot is an investment vehicle that provides a tax-paid lump sum for a wide range of purposes and life events, from children's education to aged care and estate planning.

The bonds are designed for people on a marginal tax rate of more than 30 per cent seeking long-term growth. They offer access to 19 managed funds at wholesale prices covering all asset classes, and the ability to switch between funds without triggering personal or capital gains tax.

Underlying fund managers include Perpetual, Vanguard, Credit Suisse, Templeton, Dimensional, Perennial, UBS and Tyndall.

How it works Money invested in the bonds compounds in a tax-paid environment. As there are no income distributions during the life of the investment, there is no personal tax liability and nothing to declare in your annual tax return.

All tax on income and capital gains is paid internally at a rate of 30 per cent, although the effective tax rate may be as low as 21 per cent due to the availability of imputation credits in some of the underlying funds.

Investors select a term of between one and 99 years and pay no personal tax when they withdraw funds after 10 years. If you withdraw all or part of your investment within 10 years you receive the full unit price but you will be liable for capital gains tax on a deferred basis in the year you make the withdrawal.

However, a 30 per cent tax offset is available in the first 10 years. This can be applied to any capital gains on early redemptions as well as other personal income tax liabilities and capital gains.

Say an investor on the top 46.5 per cent rate, whose initial $100,000 investment had grown to $150,000 in six years, decided to sell. They would declare the $50,000 growth component on their annual tax return, the Tax Office would calculate the 30 per cent tax offset and the investor would pay tax of 16.5 per cent on the bond's growth.

Ross Higgins, the managing director of Austock Life, says a high tax payer is better leaving their money in the bond for 10 years. However, if they retire and become a low (or no) tax payer, then they can draw down early and claim the 30 per cent tax offset to wipe out any tax liability.

Because of the imputation bonds' tax status, you can make additional contributions provided they don't exceed 125 per cent of contributions made the previous year. If you exceed the 125 per cent rule the 10-year qualification period (after which all earnings are tax free) will restart from the year you made the excess contribution.

What it costs The bond has a minimum investment of $10,000 ($5000 for savings plans) and $1000 for additional contributions ($200 a month for savings plans). There is a contribution fee of up to 4 per cent on each investment made: 1 per cent to Austock and 3 per cent to advisers, who can rebate all or part of this fee. Higgins says many planners are foregoing the full 3 per cent. On policies above $50,000, where the planner has negotiated down their commission, Austock will also forego its 1 per cent.

Ongoing fees include up to 0.91 per cent a year for administration, management and expense recoveries; a 0.19-1.24 per cent management fee charged by the underlying fund managers, depending on the funds selected; and a trail commission of up to 1 per cent. Thus, ongoing fees may range from 2.1 to 3.15 per cent.

You can switch investment options up to three times a year gratis but there is a $50 charge for additional changes.

David Wright, of research house Zenith, says the fees charged by Austock are reasonable given the many applications of the bonds and are partially offset by the access to wholesale funds, which charge lower investment management fees than retail funds.

Pros Higgins argues that imputation bonds are the next best tax structure to super and combine this with a wide range of financial planning purposes, from tax management and education funding to estate planning. Wright rates the bonds as "recommended", and says he has "rarely reviewed a product that offers so many potential investment applications".

Parents or grandparents planning for a child's education can invest in the child's name to vest anywhere between the ages of 10 and 25, avoiding punitive child tax rates.

The bonds can also be used to reduce and defer tax to a time when you move to a lower marginal tax rate, perhaps on retirement, and to quarantine investment income to qualify for government benefits.

The ability to withdraw money when you like means the bonds can be used as a de facto annuity, staving off the need to dip into your super. They may also be an attractive alternative for investors who have reached their super contributions cap and want to invest additional amounts in a tax effective environment and withdraw at any time without penalty.

Higgins says the bonds offer many of the advantages of super, without some of super's drawbacks. Like super, bond assets are protected from creditors, within certain limits, in the event of bankruptcy. Unlike super, if the investor dies the bond's full benefits are tax free in the hands of the nominated beneficiaries, including non-dependent children who pay a 16.5 per cent exit tax on death distributions from super. This makes the bond a useful estate planning tool.

The bonds may also be owned jointly by up to three people: in the event of the death of one, ownership transfers to the others without having to go through normal will and estate procedures.

Wright says another major attraction is the 125 per cent rule, which means you can make increasing contributions over the life of the bond, "in particular, closer to the bond's post 10 year optimal tax-free period".

Cons Wright says the only issues preventing him giving the imputation bonds Zenith's top rating were the fact that the product does not have a track record - it's only been around for two years - and Austock Life is a relatively small outfit.

Investment returns will be variable and depend on the performance of the underlying funds. Last year, returns varied from 3.36 per cent for the Tyndall Australian Bond Fund (still above the cash benchmark), and 39.4 per cent for Perpetual's Wholesale Geared Australian Fund.

Where it fits in Austock's imputation bonds are a unique and highly flexible product but one that the majority of investors and planners have yet to get their head around. Used strategically, they can be used to plan for a wide range of life events.

Higgins says there are plans to launch a margin lending facility with Macquarie Bank in the near future.