Capital Investment Bonds
Capital investment bonds, often simply called investment bonds, are single-premium life insurance policies used for investment purposes. They are designed to generate capital growth or income over the medium to long term, typically five years or more.
An investment bond is created with a single lump-sum payment to an insurance company. Your money is then invested across a range of funds, providing the potential for growth. The policy is technically a life assurance contract, but it requires no medical checks and is open to investors of nearly any age.
Investment horizon and access
Bonds are designed as medium- to long-term investments. While you can access your money through regular or one-off withdrawals, cashing in the entire investment early, especially within the first five years, may incur surrender penalties or early encashment charges.
Onshore vs. Offshore Bonds
Bonds can be established either onshore (within the UK) or offshore (often in jurisdictions such as the Isle of Man or the Channel Islands). The main difference is in how they are taxed.
- Onshore bonds are taxed within the fund, which means a UK basic-rate taxpayer may have no further tax to pay on gains.
- Offshore bonds benefit from 'gross roll-up', meaning the underlying funds grow free of UK tax. Tax is only payable by the investor when a chargeable event occurs, such as cashing in the bond or taking excessive withdrawals. The most suitable option depends entirely on your personal tax situation and residency status.
Contributions and withdrawals
Bonds offer flexibility with contributions. While there is usually a minimum investment, which can be around £10,000, there is often no upper limit on how much you can invest. Depending on the provider, you may also be able to make additional top-up payments.
One of the key features is the ability to make tax-deferred withdrawals. You can withdraw up to 5% of your original investment each policy year without incurring an immediate income tax liability. This allowance is cumulative, so any unused portion from one year carries over to the next.
Remember that these withdrawals represent a return of your initial capital, which will decrease the value of your investment. Taking withdrawals above this 5% limit or fully surrendering the bond can trigger a chargeable event gain, which might be subject to income tax.
Charges
The charging structures for investment bonds can vary significantly between providers.
Common charges include:
- An initial charge when you first invest.
- Annual management charges for the underlying funds.
- An ongoing policy fee.
- Early encashment or surrender charges if you cash in the bond within a set number of years.
Common uses and considerations
Investment bonds can be used for several financial planning purposes, such as portfolio diversification or generating an income stream in retirement. They also offer potential tax planning benefits. For example, a bond can be assigned to a spouse or civil partner, or gifted into a trust, subject to specific rules.
However, it is crucial to understand that an investment bond is not a cash deposit account. The value of the underlying funds can go down as well as up, and the returns are not guaranteed. You could get back less than you originally invested.
THE VALUE OF INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.
TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.
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