Investment bonds, also known as insurance bonds or investment-linked life insurance policies, are financial products that combine elements of life insurance and investment. They are offered by insurance companies and provide individuals with the opportunity to invest a lump sum of money in a variety of investment options within a tax-efficient framework. Here are some key features and considerations of investment bonds:

  1. Structure: Investment bonds are structured as insurance policies, with the policyholder typically being the life assured. The policyholder makes a lump-sum investment into the bond, which is then invested in a range of underlying investment options, such as stocks, bonds, property, or cash.
  2. Tax Efficiency: Investment bonds offer tax advantages. Within the bond, the underlying investments grow free from income tax and capital gains tax. However, the bond provider pays tax on behalf of the policyholder at a rate known as the ‘life insurance policyholder tax rate.’ This means that policyholders do not have to report any income or gains from the underlying investments on their tax returns, making it an attractive option for individuals in higher tax brackets.
  3. Withdrawals and Access: Policyholders can make withdrawals from the investment bond at any time, subject to certain limits and restrictions. Withdrawals can be made as regular income payments or as partial withdrawals. However, it’s important to note that withdrawals may be subject to taxation, especially if they exceed the annual tax-deferred allowances. Additionally, some investment bonds may have surrender penalties or exit charges if funds are withdrawn within a specified period.
  4. Life Insurance Component: Investment bonds typically include a life insurance component, which provides a death benefit to the nominated beneficiaries in the event of the policyholder’s death. The death benefit is generally equal to the greater of the bond’s value or the original investment amount. This feature can provide financial protection for loved ones.
  5. Investment Options: Investment bonds offer a range of investment options to suit different risk appetites and investment goals. Policyholders can typically choose from a variety of managed investment portfolios or specific investment funds. This allows for diversification and the ability to tailor the investment strategy to individual preferences.
  6. Charges and Fees: Investment bonds may have various charges and fees associated with them, including initial charges, annual management fees, and administration fees. It’s important to understand the fee structure and consider their impact on investment returns.
  7. Estate Planning: Investment bonds can also be used for estate planning purposes. They can be assigned to beneficiaries or placed into trust structures to help mitigate inheritance tax liabilities.

It’s crucial to carefully assess your investment goals, risk tolerance, and tax situation when considering investment bonds. Consulting with a financial adviser is advisable to ensure the product aligns with your specific needs and circumstances. They can provide guidance on the suitability of investment bonds and alternative investment options.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested. HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.