Wealth Management

Investment Bonds

Technically, an Investment Bond isn’t a bond, but a type of investment fund. There are two types: with profits or unit-linked.

The same tax rules apply to both. The insurer pays tax on growth and on income accrued in the fund. When the bond is encashed, growth* is added to your other income for the tax year. If you are a basic rate taxpayer and the total is within the basic rate, you will have no further tax liability. Higher or additional rate taxpayers are liable to 20% or 25% tax on growth 'Top slicing' relief may reduce or eliminate taxable growth for basic rate taxpayers who become higher rate taxpayers only because of the growth.

Investment bonds are single premium ‘whole of life’ policies. They can be written on single or joint lives (we will advise on the option that best meets your needs). There is usually a choice of investment funds and, at surrender or on death, a lump sum is paid out. The amount will depend on the bond’s performance and the effect of any withdrawals.

The nominal life assurance element means your bond will pay out slightly more than its value if you die during its term. For that reason, capital gains tax doesn’t apply to this type of investment.

The facility to withdraw 5% per year as income is one of the biggest benefits. Tax is deferred until encashment. This is attractive to higher rate tax payers who expect to pay standard rate tax when they retire. They can take income, knowing their tax position in retirement is likely to reduce or negate any income tax that might have been payable.

The minimum that providers accept into in an Investment Bond is between £5,000 and £10,000, and you should expect to tie up your money for at least five years. You should also be comfortable with the fact that the value of your investment can go down as well as up, and you may get back less than you invested.

Some bonds offer a guarantee that you won’t get back less than you originally invested, and it is important to check the terms & conditions at the outset, so you know what to expect. Any guarantee is a promise made by the provider only. It does not imply a third party underpin of investment performance.

If you need access to your money, you can generally withdraw it whenever you wish, but some providers levy a surrender charge in the early years. The policy conditions will clarify this. You should always take qualified advice before fully or partially encashing an investment bond, because tax rules and the way you arrange the withdrawal can create unexpected tax charges.

We are happy to advise on Investment Bonds and whether this type of investment would meet your income and growth needs.

* For income tax purposes, 'growth' ignores a permitted 5% annual 'income' withdrawal but includes withdrawals in excess of that figure