Investment bonds are offered by life insurance companies and are a way of allowing you to invest in a mixture of investment funds that are managed by professional investment managers. Each fund is usually designed to provide benefits for different types of investors, but a common element is that they aim to produce long term capital growth and / or generate a long-term return.
Investment Bonds are effectively just an investment wrapper and should not be confused with ‘bonds’, which are effectively loans in the forms of gilts, corporate bonds and high yield bonds.
When you invest in an investment bond you will be allocated a certain number of units in the funds of your choice. Each fund will invest in a range of assets and the price of your units will normally rise and fall in line with the value of these assets.
Investment bonds are single premium life insurance policies, meaning that a small element of life insurance is provided. This is paid out after your death.
What are the main benefits of an investment bond?
- Regular withdrawals can be taken. By taking your regular withdrawals you can supplement any other income you have. You can choose to withdraw a set amount or a set percentage of the amount you originally invested
- Tax Benefits. The life fund will pay corporation tax on any gains it receives which will satisfy the liability to basic rate tax. In addition, you can withdraw up to 5% of the capital amount invested each policy year without triggering an immediate chargeable event for up to 20 years. This allowance is limited to the amount of capital invested – annual withdrawals of 5% can be taken for 20 years
- You can choose to invest in a range of funds, you can choose a portfolio, or you can choose a mixture of both
- You can usually switch between funds within your bond
- Investments Bonds can be written in trust which can be useful in inheritance tax planning matters
Offshore Investment Bonds
An Offshore Investment bond effectively has the same features as a normal Onshore Investment Bond but it has additional tax benefits.
The offshore life fund pays no corporation tax on any gains it receives. Interest and dividends benefit from ‘gross roll-up’. You will not be liable for tax on income and gains of underlying investment funds.
In addition, as with the onshore investment bond you can withdraw up to 5% of the capital amount invested each policy year without triggering an immediate chargeable event for up to 20 years. This allowance is limited to the amount of capital invested – annual withdrawals of 5% can be taken for 20 years.