Investment Bonds
Investment bonds are lump sum investments sold by life insurance companies. The minimum initial investment is usually £5,000 to £10,000. Your monies will be used to buy units in the funds of your choice, which can be set up to provide long term capital growth, an income, or a combination of the two. As with any equity or part equity based investment, the value of your funds and, therefore, your investment, can go up and down. It is important therefore to diversify your portfolio – don’t put all your eggs in one basket – so spread your funds across the different investment sectors.
Investment bonds are technically single premium life insurance policies. This means an element of life insurance is provided. The amount of cover is negligible however, usually less than one percent of the fund value. The life assurance element allows the Life Office to take advantage of preferential tax treatment - often making their bonds attractive investment vehicles.
Why might an Investment bond be right for me?
If you are a taxpayer seeking an extra income you are allowed to withdraw up to 5% of your initial fund value every year without the need to inform the Inland Revenue and defer paying tax for 20 years. By deferring the tax to a later date you are not only earning more from your investment, but you may also be in a lower tax bracket when the tax liability manifests (perhaps when you retire), meaning your tax bill is further reduced.
Annual withdrawals from your bond do not count as income, so they will not affect your personal tax allowance. This is particularly good for investors over 65 who wish to supplement their annual income without exceeding the ‘age allowance’.
Switching between funds does not incur a Capital Gains Tax liability. This is good for active investors who are already using their annual Capital Gains Tax allowance.
