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 investment bonds work
- 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
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 bonds 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.
Investment bonds risk and return
- Some investments offer a guarantee that you won’t get back less than you originally invested.
- By choosing a fund 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, 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 the next year.
If you’d like to arrange a no-obligation meeting to discuss how we can help you please get in touch today, either by calling us on 01452 547783 or using our contact form.