Savings & Investments Part 5: Investment Bonds

Investment bonds are single premium savings contracts usually bought from an insurance company. That means you pay the insurance company a lump sum which they will invest on your behalf in the fund(s) of your choice

The key attractions of these products for retirees are:

      • You can withdraw up to 5% per annum tax free if you are a basic rate tax payer (and the withdrawal doesn’t take you into a higher rate band). This is because the fund into which your money is invested will already have paid tax equivalent to the basic rate.
      • Even if you are a higher rate tax payer there is no income tax payable immediately, though there may be liability to income tax (the difference between the basic and higher tax rates), but usually not for 20 years.
      • The 5% withdrawals don’t count toward your income, so it will not impact your age allowance.
      • The withdrawal can be triggered automatically so you don’t need to request the money each time.
      • If you are likely to need long term care, these products are generally not counted towards your assets when your eligibility is being considered by the Local Authority.

Where can I invest? 
These are often ‘pooled’ investments, so you choose the funds you’d like your money invested in. For example, you can either choose individual funds invested in property, equities, bonds, even cash, or commonly one of the following:

      • Managed funds. These funds invest in a mix of assets. Usually, a combination of equities, bonds, property and cash.  Often you can choose a managed fund based on your appetite for risk. For example, funds may variously be described as Cautious, Balanced or Adventurous.  A Cautious fund may hold 30-40% in equities while an Adventurous fund may have double this amount.
      • With profits funds.  With profits funds also invest in a mix of assets, like managed funds, but they attempt to take away some of the worry people feel when the value of their savings falls. They achieve this by a process called ‘smoothing’.  ‘Smoothing’ means the company holds back some of the investment returns in the good years to subsidise the returns in the poorer years. In this way, the returns don’t rise and fall so dramatically each year.

Do always remember that, in funds like these, the value of your investment can fall as well as rise and any income payable is not guaranteed.

Finally, the funds described in this section are called ‘onshore’ investment bonds.  You can also consider ‘offshore’ investment bonds. These are more specialist in nature, but may be advantageous in certain circumstances (for example, if you plan to retire abroad).

If these products sound of interest to you, you should seek Independent Financial Advice.