What is an Investment Bond?
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, while 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. Most investment bonds are whole of life. There is usually no minimum term, although surrender penalties may apply in the early years.
Usually, you have 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 bond’s terms and conditions and may depend on investment performance.
| Advantages | Disadvantages |
| • Ease of access - you can withdraw up to 5% each year, of the amount you invested, without immediate tax liability | • The value of your investment can go down as well as up depending on market circumstances |
| • Diversified investment choice | • No tax relief on money invested |
| • Ability to alter fund choice | • Non-taxpayers cannot reclaim tax paid within the fund |
| • Can be jointly owned | • Lump sum investment only |
| • Suitable for a range of risk attitudes | • The investments that make up your bond will be taxed within the funds during the investment period |
| • Growth potential from investments diversification | • You may have an additional income tax bill at the point you cash in your investment if your growth gains push your income into the higher or additional rate tax bracket in that year. The full value of your bond gain may also have an impact on your benefits and allowances |
| • Benefit from money being pooled with other investors | |
| • Life cover element | |
| • Potentially efficient for Inheritance Tax planning, when held in a Trust | |
| • Ability to transfer part of your bond to a named beneficiary (e.g. child/grandchild to help them financially) |