Investment bonds

Investment bonds are designed to produce medium- to long-term capital growth, but can also be used to give you an income. They also include some life cover.

There are other types of investment that have ‘bond’ in their name (such as guaranteed bonds, offshore bonds and corporate bonds), but these are very different.

How investment bonds work

You pay a lump sum to a life assurance company and this is invested for you until you cash it in or die.

Investment bonds are not designed to run for a specific length of time but they should be thought of as medium- to long-term investments, and you’ll often need to tie up your money for at least five years. There may be a charge if you cash in the bond during the first few years.

The bond may includes a small amount of life assurance and, on death, will pay out slightly more than the value of the fund.

For most investment bonds, you take the risk of losing some money for the chance of making more than you could get from putting money in a savings account. Some investment bonds offer a guarantee that you won’t get back less than your original investment, but this will cost you more in charges.

Where your money is invested

With our advice you can invest in a portfolio of investments that matches your own attitude to risk.  Typically these might include UK and overseas shares, fixed interest securities, property and cash.

Investment risk can never be eliminated but it is possible to reduce the ups and downs of the stock market by choosing a range of funds to help you avoid putting all your eggs in one basket. This is known as asset allocation.

Different investment funds behave in different ways and are subject to different risks. Putting your money in a range of different investment funds can help reduce the loss, should one or more of them fall.


Any growth in investment bonds is subject to Income Tax. The investment will pay tax automatically while it is running so, if you are a:

  • non-taxpayer – you will not have to pay any further Income Tax but you cannot reclaim any tax;
  • basic-rate taxpayer – you will not normally have to pay any further Income Tax; and
  • higher-rate taxpayer (or close to being one) – if you withdraw more than 5% of the original investment amount in a year or you have made a profit when you cash in the investment, you may be liable for more Income Tax.

Depending on your circumstances, the overall amount of tax you pay on investment bonds may be higher than on other investments (like a unit trust, for instance). But there may be other reasons to prefer an investment bond. For example it may be that the policy can provide a tax-deferred income (see below) where other investments would incur an immediate tax liability. Or you may want to set up the investment within a trust as part of your inheritance tax planning (but note that you normally lose access to at least some of your money if you do this).

Withdrawing money from an investment bond

You can usually take out some or all of your money whenever you wish but there may be a charge if you take money out in the early years.

You can normally withdraw up to 5% of the original investment amount each year without any immediate Income Tax liability. The life assurance company can pay regular withdrawals to you automatically. These withdrawals can therefore provide you with regular payments, with Income Tax deferred, for up to 20 years.