Onshore Investment Bonds are collective investments products with some similarities to unit trusts and investment trusts. Indeed unit trust and investment funds can often be accessed through an investment bond. The primary difference is that these are written under Life Insurance legislation with a negligible amount of life cover. There is no fixed term to an investment bond and 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 to reflect the attitude to risk of the investor. With the exception of some with profits investment bonds, the product providers usually offer the ability to switch between a wide range of different funds covering asset classes such as equities, fixed interest investments, property and cash deposits. The investor can switch between funds without incurring capital gains tax and this allows you to invest in as many funds as required which can help create a diversified investment portfolio.
Onshore Investment Bonds cover a wide range of product types, such as distribution bonds, guaranteed bonds and with profits bonds. All investment bonds offer access to investment funds either managed by the investment bond provider or by external fund management companies.
Investment bonds are considered to be medium term investments to be held for a minimum of 5 years. 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 until encashment or incurring a “chargeable event“.
Investment bonds can be surrendered in whole or in part at any time, but may be subject to encashment penalties in the early years. If the fund invested in is a “with profits” fund, it may be subject to a “Market Value Adjuster”, which is a penalty levied by the product provider during times of adverse market conditions to protect the fund from outflows. For more on encashment penalties, refer to the column “exit fees” in our “Research & Buy Investment Bonds” module.
Onshore investment bonds offer a range of benefits:
- Convenience: You can have a diversified portfolio of investments held under one roof, with a single valuation showing you each individual fund.
- Simplicity of tax reporting: You do not need to disclose your investment bond on your annual tax return until you incur a chargeable event. This is not the case with other types of collective investments, such as unit trusts or investment trusts held outside of an ISA wrapper, where income and accumulations have to be disclosed annually.
- Income: You can take up to 5% per annum cumulative tax deferred withdrawals, payable from one source. This compares favourably to receiving income from collectives such as unit trusts where the income is unpredictable since it depends on the yield of the underlying assets which can vary, and at a frequency defined by each individual fund. Income seekers often require budgetary certainty and an investment bond can offer them this. Further, the income received does not affect your Age Allowance.
- Ownership flexibility: Onshore bonds allow single or joint life ownership and can be easily assigned using a deed to take advantage of spouses or civil partners who may be lower rate tax payers.
- Trust use: Investment bonds can easily be written in trust. There are a wide range of trusts available and this can be particularly advantageous for Inheritance Tax planning.