Investment Bonds

These have developed over many years of tax legislation to include some interesting features, including the "tax wrapper". These features can make them attractive from both a tax point of view and from an Inheritance Tax planning standpoint. It is a packaged investment product which produces growth, although tax (where payable) is chargeable to income tax.

Features:

• Onshore bonds suffer corporate taxation within the investments, (which is deemed to be equivalent to the basic rate of income tax). For an investor who remains a basic rate taxpayer throughout the life of the bond, there would be no further tax to pay on growth of the bond. 

• Taxation is deferred until a chargeable event occurs.

• Regular Income is available by encashment of units. The typical withdrawal is 5% p.a. of the original investment (being the Revenue's maximum before a chargeable event occurs). 

• The Revenue allow 5% p.a. of the original investment over twenty years, (aggregated) - i.e. up to 100%. This is deemed a repayment of capital. Any greater amount in aggregate causes a chargeable event, whereby a charge to tax could arise.  

• Policy is usually written in multiple segments, offering more flexibility on partial encashment. 

• Minimal amount of life cover (usually 101% of the value of units)

• No fixed term to the investment.

• Simplified taxation  means less record-keeping and accounting is necessary in the hands of the investor or the trustees holding the investment.

Unit-linked Bonds

An investment bond will be invested in unitised fund(s) chosen by the investor. Bond providers offer a wide choice of funds, often with external fund providers, and the choice can be impressive. Switching between funds within the bond is usually cheap (or free) and does not in itself give rise to a chargeable tax event.

Distribution Bonds

This is a unit-linked bond designed to yield an income for distribution: typically the target yield is 125% of the yield of the FTSE 100 or similar index. Although a distribution bond could theoretically hold 100% fixed interest, in practice the term is more commonly used to refer to funds which contain some exposure to equities. 

With-Profits Bonds

Designed to smooth the returns of a mixed fund. Investors receive bonuses to their funds as determined by the fund providers and based upon the returns of the fund and the reserves deemed appropriate. Upon leaving the fund, a terminal bonus is usually payable. Once the most popular type of bond investment, they have in  recent years fallen out of favour as the falling markets of 2000 - 2003 decimated funds, causing providers to apply market-value reductions (down-valuing policies) for those wishing to leave the fund.  

What you will get back depends on how your investment grows. The value of the investment is determined by the value of the units, the price of which can fall as well as rise. You should remember that past performance is not necessarily a guide to future returns.