Investment bonds adopt the capital appreciation strategy; they aim to increase the value of your original investment over time. They are designed for medium to long term growth although some investors may opt to take an income. Some bonds may also include life cover as well.
Investment bonds do not have a maturity date but ideally will need to be tied up for at least five years to make investing worthwhile. The bond will stay invested usually until you die or you cash it in, if you were to cash it in within the first few years then you should expect there to be a penalty charge.
As with most investments there is an element of risk, so you may not always receive back the same or more than the amount you initially invested. Some investment bonds do offer a guarantee that your investment will not fall below the original sum, however the piece of mind will cost you more in charges. As some bonds include life insurance, should you leave it invested until death the sum paid out will usually be slightly more then the value of the fund.
You can choose where to invest funds whether it is in the UK, overseas, fixed interest securities, property and cash. You can also invest in funds managed by other companies however they are likely to have far higher charges.
As mentioned there is almost always an element of risk associated with investments however there are means of reducing the level of risk adopted. Choosing a range of investment funds will help spread the risk, so should you be faced with the loss from one or more funds, there are others to maintain stability. This is known as diversification, and is a practice used across many types of investments.
There will be initial charges and annual charges for the management of your fund.
Case study.
David invests £100,000 into a bond and withdraws 5% each year as income (£5000). David is employed earning £70,000 per annum and therefore pays a marginal rate of tax of 40% on his income. However, as he holds the capital amount within a bond, he can defer the tax payable up to a 5% withdrawal maximum until he cashes in the bond. In this scenario David cashes in the bond when his income has reduced and he only pays basic rate tax of 20% on his income. He therefore pays basic rate tax on the deferred element of the income.
The main benefit here is that David has paid less tax on income than he would have by withdrawing the income directly from a direct investment product.
*Bond value is not reflective of real performance. Investment value can be more or less than the initial investment and will be reflected in the performance of the underlying fund. The values used are for illustrative purposes only.