Are Investment Bonds Right For You?

Saving up cash is something many people look to do to prepare for the future, but knowing how best to make those pounds count can also be a bit of a headache. However, investment bonds are one consideration as to how to make your money work for you.

Rather than simply putting your money into a savings account, you can choose to take up a bond at an investment risk of your choosing, and the higher the risk, the higher the potential yield from your investment.

Investment bonds give you the chance to put your money into a variety of funds, which are then managed for you by professional investment managers. The usual practice in setting one up is to generate long term financial gain, but it is also possible to use them to generate a regular income.

Usually, these kinds of bonds have a minimum initial investment of around £5,000 as a lump sum and this sum entitles you to an allocation of shares or units in a certain product or fund of your choice, which leads to a portfolio of investments.

The price of your investment will then increase in line with the value of this portfolio, and so the value of your bond will rise. As these bonds are often also premium life assurance policies, an element of life cover can also be added to your investment, which will be paid out in the event of your death.

When investment bonds first began to spring up in the late 20th century, there were only a choice of a few funds in which to invest, such as UK equities, overseas equities, commercial property, fixed interest securities and cash. You could decide between an amalgamation of investments and then switch between them free of charge, up to twice a year.

Profit bonds became fashionable around the 1990’s, as these invested in a spread of funds, and the gains were passed on in a different way. Profit funds returns are passed on through bonuses which are decided by the insurance company, in order to try and level out the rate of returns, and thus avoid the ups and downs in the stock market that generally occurred.

The value of bonds can still vary, but most often now boast a good record in bringing the investor a regular income.

Tax benefits are one thing you need to think about when considering investing in a bond. Investment bonds are a kind of life assurance, and so the insurer is liable to pay tax on the income, as well as on the capital growth generated by your fund. You do not have to pay capital gains tax on any profit you make, and neither must you pay basic rate income tax.

If you are a higher rate taxpayer, then it is possible that you could end up liable to income tax, which would then be calculated at a rate equal to the difference between the basic rate and the higher rates.

This would not happen until you either cash in your bonds or make a partial withdrawal (over five per cent per annum) of your original investment.

This benefit comes because of a special law that permits annual withdrawals from insurance bonds of up to five per cent for 20 years without any immediate tax liability.

Investment bonds can therefore often be an attractive prospect to those looking for something more dynamic than a savings account or for those simply unhappy with the possible savings interest rates which are on the table for them.

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