Investment Bonds: How Do They Work and Other FAQs


Investment bonds are a mid to long term investment vehicle that can help you grow your savings ready for later life. Technically, there’s no limit on what the money you invest can be used for, however typically people purchase investment bonds with the intention of putting aside money for retirement, or as a form of life insurance.

Although investment bonds are a popular financial product, a lot of people don’t really understand the ins and outs. You would need to go through a financial advisor in order to purchase a bond, but it’s still important to understand it for yourself.

How do investment bonds work?

The concept of an investment bond is quite straightforward. You purchase a bond from your insurance provider, usually with a minimum investment amount of at least £5,000 – sometimes as much as £10,000 – and there will likely be a choice of funds that you can invest the money into. It’s sensible to take advice on which funds to choose.

The hope is that your investment will then grow over time. You can withdraw the money over time or as a lump sum, and the money will also pay out to a nominated individual if there is money left when you pass away.

Are investment bonds safe?

This is a type of investment, so your money is at risk. If the investment funds you choose don’t perform as well as hoped, then you might lose money over time. There are some bonds that guarantee you’ll get back at least as much as you originally invested, which will give you some added security.

In terms of keeping the money that you do have invested safe, investment bonds are considered one of the most secure investment types.

Is the money taxable?

Tax is where things start to get slightly complicated, and there are pros and cons. One of the best points is the fact that you can take out 5% of your investment every year for up to twenty years without paying tax. This makes it a could option for those with large investment sums that they want to make the most of. The money also won’t count towards your personal allowance threshold, and you can gift tax-free bonds to surviving loved ones.

However, any income or gains that you get from your bonds will be taxed at up to 30%. Any tax owed will be payable when the tax is cashed in. This does mean that it’s still a great option for higher rate taxpayers, who will reduce their overall tax liability.

What about inheritance tax?

Inheritance bonds are often considered as a good option for those planning for inheritance tax. If you decide to gift the bond to your spouse or other beneficiary then the money will be exempted from a pretty significant 40% inheritance tax rate.

Are investment bonds regulated

You should by your investment bonds through a respected financial services provider that is regulated by the Financial Conduct Authority, ideally with the help of a trusted financial adviser. This will ensure that you’re covered should anything go wrong.

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