Bonds are essentially loans in which you are the lender, receiving your money back with interest over a fixed period of time. Generally lower-risk than equities, though some are more high-risk than others
Investment bonds are life insurance policies where you invest a lump sum in a variety of available funds. Some investment bonds run for a fixed term, others have no set investment term. When you cash investment bonds in, how much you get back depends on how well – or how badly – the investment has done.
How bonds work
You invest a lump sum – the minimum is usually between £5,000 and £10,000.
Most investment bonds are whole of life. There is no minimum term, usually, although surrender penalties may apply in the early years.
Usually you or your adviser has a choice of funds to invest the money into.
At surrender or on death (or if not a whole of life bond at the end of the term), a lump sum will be paid out. The amount depends on the bond’s terms and conditions and may depend on investment performance.
Some investment bonds may guarantee your capital or your returns. These guarantees usually involve a counterparty. If so they carry the risk of counterparty failure.
How your money is invested
You have a choice of two types of funds – with-profits or unit-linked. Both have the same tax rules where tax is paid on both growth and income accrued in the fund by the insurer.
Risk and return
Some investments offer a guarantee that you won’t get back less than you originally invested.
- By choosing a bond that allows you to invest in a variety of investment funds and switch funds easily you may weather the ups and downs of the market better. Find out more about diversifying.
- Because there’s an element of life assurance, your investment bond policy may pay out slightly more than the value of the fund if you die during its term.
Access your money
You can usually withdraw some or all of your money whenever you need to, but a surrender penalty may apply if you do so in the first few years. There may also be a tax charge.
Investment bonds also allow you to make regular withdrawals each year up to a specified limit. Withdrawals of up to 5% each year of the amount that you invested can be taken without triggering any immediate tax liability. However, the tax is in effect only deferred as, when the bond is cashed in, withdrawals will be added to any profit made and taxed as income in that tax year.
Things to consider
The tax you pay on your investment bond depends on your circumstances.
Find out more about the tax advantages of qualifying life insurance investment products