How do investment bonds work?

How do investment bonds work?

If you have a lump sum to invest then investment bonds might be the right vehicle for you. Essentially, investment bonds are life insurance policies where you can invest a lump sum in a variety of available funds. Some investment bonds operate for a fixed term whereas others have no set investment term at all. Here’s a quick guide to how they work:

  • You invest a lump sum – the minimum is usually between £5K and £10K.
  • Investment bonds tend to be for whole of life. There is usually no minimum term but surrender penalties may apply in the early years of the investment.
  • There will be a wide choice of funds to invest in that you or your investment advisor need to decide upon. These will either be with-profits or unit-linked. Both have the same tax rules whereby tax is paid on both growth and income accrued in the fund by the insurer.
  • When the investment bond is surrendered, reaches its end of term or on death, a lump sum will be paid out. The amount of this lump sum will potentially depend on the performance of the investment and the bond’s terms and conditions.
  • Some investment bonds will guarantee your capital or your returns. These guarantees usually involve a counterparty and therefore carry the risk of counterparty failure.

On the whole, investment bonds are pretty safe and secure and your money is only at risk in the unlikely event of the insurance company going bust. Of course, the value of your investment can go up or down depending on how it performs.

For more information about investment bonds, please do not hesitate to get in touch.