Investment Fund Supermarket

Investment Bonds

Investment bonds are non-qualifying single premium whole of life policies. There is no fixed term to the investment. The money invested is used to buy units in a selected fund. Most insurance companies offer a wide range of funds from high to low risk - this includes ethical funds. There is an ability to switch between a wide range of geographical funds. Usually the investor is allowed one free switch each year and thereafter there is a fixed charge for each switch. The bond has no fixed term so it can be encashed in whole or part at any time, but may be subject to encashment penalties in the early years. Hence, it is sensible to keep it in force for at least 5 years to recoup the initial charges. From an on-going administration point of view, an investment bond is simple to operate, since you do not have to be concerned about dividend vouchers and complications on your tax return.

Investment bonds enjoy taxation advantages over other investments. Income paid out by the bond is deemed by HM Revenue & Customs to be net of basic rate income tax- hence the basic rate tax payer has no further tax to pay. The funds themselves benefit from being free from capital gains and income tax, provided you are the owner of the investment bond. It is possible to take a regular income by encashment of units- withdrawals of up to 5% of the initial investment amount (for the first 20 years, or until the original capital invested is returned if withdrawals of less than 5% per annum are taken), tax deferred. If the value of the withdrawals you receive exceeds 5% (cumulative) of the original investment amount, you will be taxed at your highest marginal rate of income tax on the amount above 5%. If you are a higher rate taxpayer, you would be taxed at 40%, less the basic rate of tax on savings deemed to have been paid already at 20%. If a bond is fully cashed in, there may be a liability for income tax on any amount over and above the level of your original investment, in other words the growth. On full or partial encashment, a chargeable event will occur. If you are close to the higher rate band this may give rise to a charge to higher rate income tax. If the gain has been made over a number of years, the gain is divided by the number of years the policy has been in force. This process is known as “top slicing”. Provided the “slice” does not put you into the higher rate tax band, there is no further tax to pay as the insurance company has already paid tax on the fund. This process of top slicing is efficient from a taxation point of view, since you are only taxed when a chargeable event occurs, as opposed to being taxed each year, at source, as you would be for savings interest or share dividends.

Investment bonds are not considered suitable for non-taxpayers- since they are unable to reclaim the basic rate tax deducted from the bond. However, if the non tax payer is married and the spouse is a higher rate taxpayer, it creates a valuable tax planning opportunity. This is because the investment bond can be transferred by means of a deed of assignment by the higher rate taxpayer to the non taxpaying spouse prior to triggering a "chargeable event", such as full encashment. This would mean that further liability to income tax can be avoided.

For older clients, investment bonds have an additional advantage in that income withdrawals up to 5% per annum of the original sum invested are disregarded when calculating income which would reduce a person's age-related allowances. This gives bonds an important advantage when compared to any other source of income. Hence an investment bond can be a very useful vehicle when used in conjunction with pensions for retirement planning. This is particularly the case for individuals who are currently higher rate taxpayers, but expect to become basic rate taxpayers when they retire. Even if you and any spouse are a higher rate taxpayer in retirement, you can still withdraw 5% of the original amount invested for up to 20 years without incurring a further tax liability. Since the allowance is cumulative, you could withdraw 4% per annum for 25 years. This ability to carry forward unused relief means that a bond holder who has not used their 5% withdrawals for a year, can withdraw up to 10% in the second year with no immediate liability to taxation- regardless of their tax position.

If you know which investment bond you require and do not need any advice, we are pleased to offer you access to investment bond funds at heavily reduced prices. This is possible through our fund supermarket, where some of the leading managed insurance funds can be accessed via our portfolio bond. The Key Benefits to investing in our Portfolio Bond include the following:

  • Availablility of over 250 funds from over 40 fund management groups. This represents a carefully selected spread of world class funds, enabling you to select the most appropriate asset allocation at heavily discounted rates.
  • There is no initial charge levied on new investments, provided you are under the age of 75. Neither is there any Establishment Fee which tends to be added to the on-going annual management charge in the early years of the investment.
  • Through sacrificing all initial commission, we can give you an allocation rate of approximately 106%.
  • On-going, yearly charges depend on the individual funds you have chosen. For clarification on these charges, please request an illustration- this will give you detailed key features about the charges and the effect that all charges have on future returns.
  • You can invest in up to 10 different funds.
  • You are allowed up to 12 free switches in any 12 month time period.
  • The minimum investment is £5,000, there is no maximum investment.