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.
Is an investment bond for you?
- You want to invest a lump sum – usually at least £5,000
- You can tie up your money for at least five years
- You are 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
How investment bonds work
- Most investment bonds are whole of life. There is no minimum term, usually, although surrender penalties may apply in the early years.
- You want to invest a lump sum; the minimum is usually between £5,000 and £10,000.
- Usually you have 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.
- 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 to 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. If you think you may want access to your money early, you should consider alternatives.
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.
If you don’t understand a financial product get independent financial advice before you buy.
Charges
- There may be charges to pay when you take out the bond.
- Choosing a bond that guarantees that you won’t lose money, could mean you may pay more in charges.
- Switching between an insurer’s investment funds is usually free, but you may be charged if you switch frequently.
You may have to pay a charge if you cash in within the first few years.
