Lump sum Investments and pensions, Glasgow, Scotland

Tel: 0141 563 3260
between the hours of 9am to 5pm

Mobile: 07714 090845

Email: info@mil-ifa.co.uk

Investment bonds

Investment bonds are designed to produce medium- to long-term capital growth, but can also be used to give you an income. They also include some life cover.

There are other types of investment that have 'bond' in their name (such as guaranteed bonds, offshore bonds and corporate bonds), but these are very different.

How they work

You pay a lump sum to a life assurance company and this is invested for you until you cash it in or die.

Investment bonds are not designed to run for a specific length of time but they should be thought of as medium- to long-term investments, and you'll often need to tie up your money for at least five years. There will usually be a charge if you cash in the bond during the first few years.

The bond includes a small amount of life assurance and, on death, will pay out slightly more than the value of the fund.

For most investment bonds, you take the risk of losing some money for the chance of making more than you could get from putting money in a savings account. Some investment bonds offer a guarantee that you won't get back less than your original investment, but this will cost you more in charges.

Where your money is invested

You can usually choose from a range of funds which can invest in, for example UK and overseas shares, fixed interest securities, property and cash. They can also offer a way of investing in funds managed by other companies, but this may lead to higher charges.

Many life assurance companies and friendly societies offer a with-profits fund.

Investment risk can never be eliminated but it is possible to reduce the ups and downs of the stock market by choosing a range of funds to help you avoid putting all your eggs in one basket. This is known as Diversification. Different investment funds behave in different ways and are subject to different risks. Putting your money in a range of different investment funds can help reduce the loss, should one or more of them fall.

Think carefully about how you want to invest your money and consider taking professional advice.

Whatever funds you choose, make sure they continue to meet your changing needs in the future. If you have a financial adviser, ask whether this is part of the service they provide.

You can usually switch between funds. Some switches may be free, but you may be charged if you want to switch funds frequently. Any investment growth at the time of a fund switch is not taxable.

Charges

Some companies allow you to choose how they take charges for running your bond and pay commission to your adviser.

The main types of charges on investment bonds include the following:

  • Allocation rates – the proportion of your money used to buy units in the chosen funds. This may be more or less than 100%. For example, an allocation rate of 99% is, in effect, a 1% charge on your investment. If the allocation rate is more than 100%, this does not mean you get 'free money' because other charges will offset it. Over time, the way companies take their charges may have a different impact on your investment.
  • Initial charges – you may also pay an initial charge which is shown as a percentage by which your investment is reduced.
  • Annual charges – each year you will pay annual charges to cover ongoing costs (such as the costs of fund management and administration). The amount you pay will vary from one bond to another (and may depend on the funds you hold within the bond).
  • Cash-in charges – when you decide to withdraw some, or all, of your money, you may be charged to do so (particularly if you withdraw money in the early years).
  • There may also be other charges on the bond. If you find it difficult to understand how all the charges work or their likely impact on your investment, consider using a different bond or investment type that you are better able to understand.
Tax

Any growth in investment bonds is subject to Income Tax. The investment will pay tax automatically while it is running so, if you are a:

  • non-taxpayer – you will not have to pay any further Income Tax but you cannot reclaim any tax;
  • basic-rate taxpayer – you will not normally have to pay any further Income Tax; and
  • higher-rate taxpayer (or close to being one) – if you withdraw more than 5% of the original investment amount in a year or you have made a profit when you cash in the investment, you may be liable for more Income Tax.

Depending on your circumstances, the overall amount of tax you pay on investment bonds may be higher than on other investments (like a unit trust, for instance). But there may be other reasons to prefer an investment bond. For example it may be that the policy can provide a tax-deferred income (see below) where other investments would incur an immediate tax liability. Or you may want to set up the investment within a trust as part of your inheritance tax planning (but note that you normally lose access to at least some of your money if you do this). If there is not a good reason to take out an investment bond, you may be better off using a different investment with a lower tax liability.

Withdrawing money from a bond

You can usually take out some or all of your money whenever you wish but there may be a charge if you take money out in the early years.

You can normally withdraw up to 5% of the original investment amount each year without any immediate Income Tax liability. The life assurance company can pay regular withdrawals to you automatically. These withdrawals can therefore provide you with regular payments, with Income Tax deferred, for up to 20 years.

Things to think about before investing in an investment bond

Before you take out an investment bond you should be given a Key Features Document that explains the main advantages and disadvantages of a particular company's product. There will also normally be a personalised illustration of benefits and charges. If there are lots of funds to choose from you should ask for a guide which explains them. A financial adviser will help you understand the bond, any choices it gives you and how you might be taxed.

You should consider whether an investment bond is suitable for your circumstances or if a different investment would be better. Think about the following when considering whether an investment bond is right for you.

  • Tax – depending on your circumstances, other types of investment, such as a unit trust, may mean you pay less tax. Make sure you understand the tax implications of investment bonds and whether a different product would be better for you.
  • Commission – investment bonds can pay more commission to advisers than other types of investment (though many advisers reduce the amount of commission they take from bonds). If you are getting advice, ask how much commission your adviser will get and how much they would get if they were to recommend a different type of plan (such as a unit trust). If the investment bond pays more commission, ask what extra service you are getting for this money and why a bond is the best product for you. Make sure you are happy with the answer. You may get a better deal if a different investment is used or if your adviser reduces their commission to the same level as on other products. Ask if the commission pays for advice for the lifetime of the investment bond.
  • Charges – make sure you understand all of the charges that you would pay on the bond, their effect on your investment and that you are comfortable that the likely benefits justify paying them.
  • Cash-in charges – investment bonds may have cash-in charges in the early years, whereas some other investments do not. Think whether you will need your money before this period is over. If you think you might, consider using an investment (such as a unit trust) which doesn't have an early cash-in charge.
  • Initial charge – do not assume that paying an initial charge means that any investment plan is not good value for money if you plan to hold the investment for a long period of time. You may find that investments that have an initial charge have lower ongoing charges and this means that they are better value for money over the longer term.
  • Inflation – this means that your money will buy less each year. Think about whether the investment funds you choose are likely to grow sufficiently to cover both the charges and inflation. If not, the investment bond may not be good value for money.
  • Risk – make sure that you are happy with the level of risk you take and that you can afford a loss in value.
Things to think about if you already have an investment bond

If you already have an investment bond, you should regularly check to see how it is doing. You can check your latest yearly statement or ask the bond provider for some current information about it. You may also have an adviser who you could ask for help. If so, you should check if this will cost you any money. It may be that they have already promised to provide ongoing reviews paid for from commission they receive from your investments.

  • You should regularly check whether the investment fund choice remains suitable for your current needs. For example your attitude to risk might have changed, you may feel that one investment fund is likely to do better than another in the future, or you might want to rebalance your choice of investment funds as different asset classes offer different rates of performance over time. It is often possible to move money around inside the bond to choose other funds.
  • If you are considering cashing in an investment bond, make sure you consider all your options first. Many bonds have higher charges in the early years, and their value for money improves over time. Some bonds may even pay loyalty bonuses if they are held for a certain length of time. And there may be penalties if you take out more than a set amount of money in the early years. It may be better to take some money out of the investment and to leave the remainder invested.
  • If you are thinking of cashing in your bond in order to buy another investment, or have been advised to do so, you must make sure that this is in your best interests. It might be better to switch funds within the existing bond rather than to start a new policy with new set-up charges. Moving investments too often might mean you pay higher charges than you need to. Because the charges can be higher in the early years, even if your bond does not have precisely the same fund or quite the same range of funds as a new investment, it may still be better to continue with it. You might also be able to top up your bond rather than set up a new investment. Find out what you are giving up when cashing in a bond and decide if what you are getting makes up for that loss.

""NO DECISION ON LUMP SUM INVESTMENTS AND PENSIONS SHOULD BE TAKEN BASED ON THE CONTENT OF THIS SITE. ALWAYS TAKE FULL INDIVIDUAL ADVICE FIRST. THE REGULATIONS GOVERNING TAX RATES AND INVESTMENTS MAY CHANGE IN THE FUTURE.""