You have probably heard of bonds before, and may have even wondered if they are the right product for you.
Well, the first thing to say is that there are a number of different types of bond – corporate, government and investment bonds.
In this article we are going to focus on investment bonds, but we will come back to the others another time.
So, what is an investment bond?
Essentially, it is a life insurance policy, with a lump sum invested in a variety of funds. There is a minimum investment, which usually ranges between £5,000 and £10,000, dependent on the bond.
The bond is usually what is called whole of life – in other words, it lasts for the whole of your life. You can encash the Investment bond or withdraw a large part of it, should you want to, but there may be tax Implications for doing that.
Having said that, many investment bonds give you the opportunity to withdraw funds each year, usually around 5%. Dependent on your other income, there are no Income tax implications during the year for withdrawing up to 5% of the original investment per annum. Although please be aware that there are possible tax Implications if you hold the Investment bond for longer than 20 years. Should you want to take more than 5% per annum we recommend asking your financial adviser to do the maths for you, before withdrawing the money.
In terms of how the money is invested, again, this depends on the range of funds of the Investment Bond. If you like to be very actively involved in your investments, you may prefer a bond where you can choose the funds. If you prefer to be more hands off, then It Is recommended that you work with an Independent Adviser. The Adviser will usually recommend a portfolio approach, or a range of funds, to suit your investment risk profile. The Adviser recommends the funds and may make adjustments during the lifetime of the bond, based on your risk and performance of the funds. If the adviser recommends any fund changes, the adviser will always notify you beforehand, so you have the opportunity to agree with the changes recommended.
Usually, the investment is made across a range of assets classes including property, fixed interest and shares. This helps to spread the investment risk and reduce the investment volatility plus smooth out the peaks and troughs of the investment markets. But you should accept that unless you have a guaranteed bond, there is a risk that you may lose some of your investment, if the funds do not perform well.
If you opt for a guaranteed bond, there is an additional charge for purchasing the “guarantee” option. This means that the return may not be as high because the charges are deducted first, but you won’t lose your original investment. You should consider which is most important to you, when making your decision.
What else do you need to know?
There are two types of Investment bonds, an onshore and an offshore investment bond. The onshore bond is operated under the UK tax legislation. It is deemed as a non-income producing investment, meaning the funds are treated as if you have paid Income Tax at the basic rate on the amount of your gain.
Offshore investment bonds cover investments made outside of mainland UK, this includes the Isle of Man, Channel Islands and Eire. In the main, the locations are free from tax. There are usually more funds to choose from than an onshore bond and because of the lack of tax, they can grow more quickly. However, tax is still payable on any gain on the investment.
Investment bonds can also provide an excellent way of protecting your family in the future by placing a bond into trust. They are treated as being outside of your estate in the event of your death and are therefore not subject to Inheritance Tax. This is based upon the Investment Bond being In the Trust for seven years or more.
Are investment bonds right for you?
Bear in the mind:
- You need a minimum of £5,000 – £10,000 to invest
- Ideally the investment is for a period of at least five years or more – this is a medium to long term investment
- You need to be prepared that the money can go down as well as up – you may not get back the whole of your original investment If you decide to encash the Investment bond
- It provides additional life insurance – paying out in the event of your death and can be an effective tool for estate planning
Obviously, you will need to work your personal circumstances through with your financial adviser, to determine if an investment bond is the right choice for you.
If you would like to talk to us about investment bonds, please call us on 01344 875 310 – we’d be delighted to help.