What is an Investment Bond?

An investment bond is a type of single premium investment with an element of life cover so that you are normally guaranteed 101% of the original investment on your death, less any withdrawals.

The money invested into an investment bond can normally be spread around one or a number of investment funds. This can mean that you should be able to spread your risk with some investments in the bond being more secure, with others taking more risks to obtain greater returns.

Generally an investment bond falls into one of two categories:

Unit Linked investment bond - these invest in a variety of funds and their value can go up or down with their performance.

With Profit Investment Bond - these are medium risk products that add bonuses each year and on termination of the policy. Once added bonuses cannot be removed. However, they are not guaranteed to apply, and many policy holders have found in recent years that the final bonuses have been reduced. Also, these types of investment bond can be subject to market value reductions. In English this means that the life company may reduce your investment by a percentage to take into account market conditions. For this reason these types of investment bond are losing popularity.

Attractions of an Investment Bond

• Often insurance companies give you an incentive to invest in their bonds - so you may get an extra 1 - 3% invested
  
• There is no set term, for the investment bond, so you can invest for as long as you like. Normally this should be at least for 5 years
  
• You can withdraw 5% of the original investment into the bond each tax year. This is treated as return of your original investment (and therefore is tax deferred). This 5% applies even to higher rate income tax payers
  
• You can normally take flexible income options
  
• Trusts may use an investment bond as a tax-efficient investment
  
• You can withdraw all of your money at any time (although there are normally charges for doing this in the early years of the investment bond)
  
• Gains under the investment bond are free of any personal liability to income tax at basic rate, or to capital gains tax (although the funds are taxed). However, the underlying taxation that the investment bond pays will be less than the basic rate of tax.
  
• If you encash your investment bond, you will only be liable to income tax if any gains on the bond take you into the higher rate tax bracket

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For advice about an investment bond, please contact us.