Below are 10 steps which guide you through the process of purchasing an investment bond.
Step 1: How much do you have to invest?
You need to decide on an affordable amount which leaves enough left in an easy access deposit account to cover unexpected needs for liquid cash. It is also important to ensure that you have made full use of available ISA allowances before you take out an investment bond. You also need to consider fully utilising each year’s capital gains tax allowances.
Step 2: How long can you invest for?
Investment bonds are generally considered to be medium term investment vehicles. That is to say they have an investment time horizon of 5 years. Whilst it is usually possible to access an investment bond immediately, it is not an appropriate home for funds which are likely to be accessed quickly.
Step 3: Consider your attitude to risk.
It is essential that you consider your attitude to investment risk. Within an investment bond you can choose from a wide range of funds with risk profiles commensurate with your own attitude to risk. For more on this, refer to Attitude to Investment Risk and Return.
When considering your attitude to investment risk, you need to consider affordability. If you cannot afford to lose any of your capital then you should avoid taking risks with it. You also need to consider the overall risk rating of any other investments you already hold. If this is your first and only investment then you may be more cautious in your choice.
Often people become more cautious as they get older. Younger investors have more time to allow their investments to grow and so if markets are volatile they have time to allow their capital to recover. Older clients may have to rely on their capital to provide them with an income and so may be less inclined to take risks.
Step 4: Do you require income from your investment bond?
You need to consider your immediate and future income requirements and take into account all sources of income. Please bear in mind that investment bonds allow you to take 5% of your original investment as withdrawals each year and this is a cumulative amount, meaning if you do not use your 5% withdrawal one year, you can carry it forward to the next. For this reason, investment bonds are often favoured by income seekers or for those who wish to draw a future income from their investment.
If you do require an income from your investment bond, you also need to decide how frequently you want this income to be paid. Most investment bond providers allow you to be paid your income monthly, quarterly, six monthly or yearly.
Step 5: Assess the impact of taking out an investment bond on your tax position.
You need to consider what the consequences of your investment bond purchase are likely to be on your tax position. There are a wide range of tax consequences to be aware of and you can find out more about these by referring to our Taxation of Onshore Investment Bonds section.
Step 6: Consider which investment bond options are the most suitable.
You will need to decide on whether to set the investment bond up in your name only, or if you have a spouse or civil partner in their name or in joint names. Once a bond is written it is possible to assign it to another person – typically the spouse. This can have tax planning advantages depending on the spouse’s tax position when the investment bond is surrendered or a chargeable event is triggered.
Some investment bonds guarantee the capital or the income and you need to consider whether this is an option you wish to include. This can be suitable for someone with a cautious attitude to investment risk.
Step 7: Are ethical issues a factor you wish to take into account?
Investment bonds offer access to a wide variety of ethical investment funds. We have compiled an ethical fund list to help clarify which ethical funds are available from the investment bond providers.
Step 8: Decide which investment bond provider to use.
You can do this easily by using our “Research and buy” investment bonds module.
You can also ask for a quotation from us which will show you the charging structure of your proposed investment bond.
Step 9: Consider whether you need advice.
If you are unsure as to which is the most suitable investment bond, we can offer you advice. This involves completing an Investment_Bond_Suitability_Questionnaire and we will send you a suitability report containing our recommendations.
Step 10: Purchase your bond.
You can buy your investment bond from our “Research & Buy” module which will help guide you through the purchasing process. You will be shown all the relevant forms you will need to complete and we are always available to answer any queries you may have – simply call us on 01483 825 609 and we will be happy to help.