Insurance Bonds

Insurance Bonds or Investment bonds are sold by life insurance companies and allow you to invest in a variety of funds managed by professional investment managers. They are normally designed to produce long term capital growth, but can also be used to generate an income.

The minimum investment is typically £5,000 or £10,000. When you buy a bond you will be allocated a certain number of units in the funds of your choice. Each fund will hold a portfolio of investments, such as shares or bonds, and the price of your units in other words the value of your capital will normally rise and fall in line with the value of these investments. Technically investment bonds are single premium life insurance policies. This means an element of life insurance is provided. But it is tiny, typically adding an extra 1 per cent or less to the value of your investment, if it is paid out after your death.

These bonds can fluctuate in value, but many have a good record for producing a steady income. Nowadays, many investment bonds tend to offer investors access to funds which invest in a wide range of top performing unit trusts to improve performance. A portfolio of these funds can be held within a bond and switches made between them when required.

Taxation

As bonds are life insurance policies, it is the insurance company that must pay tax on the income and capital growth generated by the investments held in a bond. Investors do not pay capital gains tax on any gains, nor do they pay basic rate income tax on any income. 

Higher rate taxpayers may become liable to income tax at a rate equal to the difference between the basic rate and the higher rates (18 per cent), but not until they cash in their bonds or make partial withdrawals of over 5 per cent per annum of their original investment. This is because there is a special rule which allows annual withdrawals from bonds of up to 5 per cent for 20 years without any immediate tax liability. It is possible to carry these 5 per cent allowances forward, so if you make no withdrawals one year, you can withdraw 10 per cent of your investment the next, without triggering a tax charge.