Updated July 2018

Your 5 Minute Guide to Investment Bonds

What is an Investment Bond?

Investment bonds are generally regarded as single premium ‘life insurance’ policies where you invest a lump sum in a mixture of funds looked after by professional investment managers. Some investment bonds run for a fixed term, others have no set investment term. There may also be a minimum investment amount – typically ranging between £5,000 to £10,000. When you cash an investment bond in, how much you get back depends on how well – or how badly – the investment has done.

Is an Investment Bond right for me?

Possibly, if you wish to invest a lump sum of at least £5,000 and can afford to tie up the money for at least 5 years. You need to be comfortable with the fact that the value of your investment can go down as well as up and you might get back less than you invested.

Is an Investment Bond right for me?

Possibly, if you wish to invest a lump sum of at least £5,000 and can afford to tie up the money for at least 5 years. You need to be comfortable with the fact that the value of your investment can go down as well as up and you might get back less than you invested.

How does an Investment Bond work?

investment bonds

1.
You invest your lump sum in your choice of funds. There is no minimum term, usually whole of life, although surrender penalties might apply in the early years.

investment bonds

2.
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 paid depends on the bond’s terms and conditions and on investment performance.

What risks am I taking?

Investments can go down as well as up! However, some investment bonds offer a guarantee that you won’t get back less than you originally invested (but that may mean you’ll pay more in charges). If you choose to invest in a diverse range of assets then you’ll be better placed to weather the ups and downs of the investment market.

Can I access my money easily?

You can usually withdraw some or all of your money whenever you need to, but a surrender penalty might apply if you do so in the first few years. There might also be a tax charge. So if you think you might want access to your money early, it may be worth considering an alternative investment.

You can make regular withdrawals each year. Withdrawals of up to 5% each year of the amount that you invested can be taken without triggering any immediate tax liability (until such time as you have had all of your original investment back). However, the tax is in effect only deferred as, when the bond is cashed in, withdrawals will be added to any profit made and potentially taxed as income in that tax year.

Always look at policy conditions to work out what charges might apply to full or partial withdrawals.

What charges will I have to pay?

There might be charges to pay when you initially take out the bond. Fund switching is usually free, but you might be charged if you switch frequently and you might have to pay a charge if you cash in within the first few years.

Insurers often offer a range of charging structures. Make sure you are happy and understand how your money will be charged.

investment bond charges

What are the tax implications?

All gains and income earned within an onshore investment bond are treated as having been taxed at 20% and paid directly out of the investment bond fund (the tax paid by the bond fund is in reality less than 20% overall). The investor is therefore classed as having already paid basic rate tax on the bond returns.

Tax may be payable by the investor when a gain is calculated on a chargeable event, such as, but not limited to:

  • Death giving rise to benefits
  • Maturity (if appropriate)
  • Surrender
  • Certain part surrenders and part assignments

Withdrawals of up to 5% a year of the original investment are allowed without incurring an immediate tax charge (until such time as the original investment has been returned, so 20 years if 5% was taken each year). If you don’t use your 5% allowance in a given year, the allowance is carried over to the following year i.e. if you make no withdrawals in year one, you could draw up to 10% the following year without incurring a tax liability. The tax is deferred and any additional tax due will be payable at the time you cash in the bond, or when it matures. All capital gains are treated as income at this point. Although tax at 20% has already been deducted, you will have an additional income tax bill if you’re a higher or additional rate taxpayer or if your gains push your income over the higher or additional rate tax threshold in the year they arise.

You might be able to avoid this by using ‘top slicing,’ a method of assessing tax chargeable on a lump sum by dividing your profit over the lifetime of your bond (including withdrawals) by the number of years the bond has been held (or in some instances back to the date of the last chargeable event) and charging accordingly. However, if the top-sliced profits still push you over the higher rate tax threshold for the year, then additional tax must be paid on some of the gain.

Offshore bonds work in a similar way, the main difference being that there is no tax (or very little) paid within the bond fund and therefore no 20% tax credit for the investor. This means that the investor will always have at least 20% tax to pay on a chargeable gain unless the gain is covered by one or more of the personal allowance, personal savings allowance and/or starting rate band for savings. The 5% allowances are still available with an offshore bond in order to defer tax and top-slicing can be used when assessing whether higher or additional rate tax is payable on a gain.

Please note that this information is not fully inclusive and is intended to provide general information only. It does not constitute personal advice. We recommend you talk to your Brunsdon Financial Adviser for further information and qualified advice. Any reference to tax treatment is based on our understanding of current (September 2018) UK, tax law and HM Revenue & Customs practice, all of which may be subject to change. The value of investments can go down as well as up and past performance is not necessarily a guide to future performance.

Let's Talk About You

We like to keep things simple for you. Just leave your name and phone number and we will call you back.