An investment bond is generally a single premium life insurance policy. They have a small element of life insurance that is paid out after your death. However, it is an investment rather than insurance in the general sense.
An insurance company will take the premium and invest it for income and or capital gains which accrue until a policyholder withdraws money from the policy. As a policyholder does not necessarily receive income from the policy, personal income tax is deferred until certain events occur and the insurance company calculates any gain on a bond. As a result, an investment bond is a potentially tax-efficient way of holding a range of investment funds in one place.
You can usually buy investment bonds from life insurance companies and they can be a good way of diversifying your capital and allowing you to invest in a mixture of investment funds that are managed by professional investment managers. Each bond is usually designed to provide benefits for different types of investors, but a common element is that they aim to produce long term capital growth and/or generate a long-term return.
The value of your investment in a bond can fluctuate and you may not get back the full amount of your original investment. Early cash-in charges may apply on some investment bonds. There are often minimum investment levels that may range from £1,000 upwards and can typically be set at £10,000. These can also be held as part of any ‘Platform’ arrangement.
When you invest in a bond you will be allocated a certain number of units in the funds of your choice or those set out by the conditions of the bond. Each fund will invest in a range of assets and the price of your units will normally rise and fall in line with the value of these assets.
What are the main benefits of an investment bond?
Regular withdrawals can be taken.
You can choose to invest in a range of funds, you can choose a portfolio, or you can choose a mixture of both.
You can usually switch between funds within your bond at no charge.
Tax planning benefits – upto 5% of your original capital (inclusive of any ongoing adviser fees) can be returned each year (for upto 20 years) before any personal liability to Income tax is assessed.
Bonds can potentially be assigned to others without a tax liability arising (e.g. your children) for their benefit if the Bond holder so desires – again, this should not be undertaken without expert advice.
