Investment bonds

Investment bonds are single premium life assurance policies. There is a high allocation to investment and relatively low life cover. They are pooled investments whereby relatively small amounts of individual investor’s money will be invested to create large pooled funds, maintained by a life assurance company.

Investments can be spread across a broad range of assets including property, shares, Government stocks and companies’ loan stocks, thereby reducing the risk for investors. It is, however, very important to realise that investment bonds are medium to long-term investments. As such they should not be considered for periods of less than five years.

There are two basic types of contract for investment bonds.

• The first of these (with-profits), the sum assured will be increased by bonuses related to the company’s profits.
• The second type of contract (unit-linked) the life assurance company maintains several underlying funds which are divided into units, the value of which is determined by the value of the assets in the fund.

The value of an investor’s investment will, therefore, be determined by the value of the units in the underlying fund and the amount of units that they hold. The funds may specialise in particular areas for example, property, shares, government securities, or they may cover some or all of these in a managed or mixed fund. Income and capital growth is accumulated within the funds.

With a UK investment bond (not an offshore bond) the tax on income and capital gains is ‘deemed’ to have already been paid within the product at basic rate by Her Majesty’s Revenue and Customs. As long as their capital remains invested within an investment bond, investors will have no personal liability for either income tax or capital gains tax.

When money is withdrawn from a UK bond (for example, to provide income) or the bond is totally surrendered there will still be no liability for either basic rate income tax or capital gains tax (the fund has already paid these). If an individual is a higher rate tax payer at the time of withdrawal then additional tax may be become payable

However, the rules governing bond taxation are such that higher rate tax may be reduced or even avoided altogether with careful planning.

It is normally possible for investors to withdraw money from an investment bond, either on a regular or irregular basis, without bringing the bond to an end. This is important where income is a priority.

Up to 5% pa of the original investment can be withdrawn as a partial withdrawal (until such time as all of the original investment has been withdrawn in this way) without triggering an immediate tax charge (the tax assessment is deferred until the bond or segment is fully encashed).

Withdrawals can be made by surrendering part of a bond, but there can be adverse tax consequences for large withdrawals, and you should seek advice before making a partial surrender. However, some bonds divide the original investment into a number of small policies. In this case withdrawals can be made by totally surrendering some of these small policies. This may have certain tax advantages for the investor.