UK Investment Bonds
UK investment bonds, also referred to as insurance bonds or with-profit bonds, are typically offered by insurance companies and investment firms. They are intended as long-term investments, with a recommended minimum term of five to ten years.
UK investment bonds are life insurance policies with a single premium. This means that you contribute a lump sum to the bond, which is then invested in a variety of funds or assets. The investment growth or returns are “rolled up” within the bond and can benefit from gross roll-up, which allows the funds to grow tax-free until a taxable event occurs.
The tax treatment of UK investment bonds is one of their defining characteristics.
Despite the fact that they are not completely tax-free, they provide some tax planning opportunities. For instance, investors may annually withdraw up to 5% of their initial investment without incurring an immediate tax liability.
This allowance may be carried over from year to year, up to a maximum of 100 percent of the initial investment, if unused. After this limit has been exceeded, any additional withdrawals may be subject to income tax.
The ‘top-slicing’ relief, which can be advantageous if a large withdrawal pushes an individual into a higher tax bracket, is another distinctive feature. A’slice’ is calculated by dividing the gain by the number of years the bond has been held. This ‘slice’ is added to your income for tax purposes, which may keep you in a lower tax bracket.
Typically, professional fund managers with the expertise and resources to make informed investment decisions manage the funds within an investment bond. The investment options range from low-risk cash and fixed-income securities to higher-risk stocks and real estate. Some bonds provide a guarantee that the invested capital will be returned in full after a specified period of time.
However, similar to other investment products, UK investment bonds are subject to risk. The investment’s value can decline as well as rise, so it is possible to receive back less than what was initially invested.
Additionally, there may be penalties for withdrawing funds from the bond within the first few years, making it unsuitable for investors who require short-term access to their funds. Before investing in these types of products, it is always prudent to seek financial advice.