Guide to investment bonds

If you’re looking for an investment option that could give you the possibility of medium to long term returns on your money along with fund management expertise, an investment bond could be worth considering. These provide access to a mixture of funds, which are looked after by professional investment managers. Of course like any investment, their value can go down as well as up and you may not get back what you put in.

Investment bonds are usually classed as a single premium ‘life insurance’ policy because a portion of your ‘life insurance’ policy because a portion of your money can be paid out upon death, but they are really an investment product.  So if your need is solely for life insurance, you may wish to research other more tailored options. 

That said, you usually buy an investment bond from a life insurance company, or directly through a financial adviser. They will invest your premium on your behalf for potential capital growth, which should build up until you withdraw money from your policy.

You can withdraw up to 5% per year of the amount invested without paying an immediate tax liability.

You can withdraw up to 5% per year of the amount invested without paying any immediate tax. An investment bond could therefore be a potentially tax-efficient way of holding a range of investment funds in one place. But if you decide to take more than 5% per year and/or you cash in your entire bond, your insurance company or financial adviser will calculate any gains on your money, and you will be subject to Income Tax. 

Some investment bonds may require a minimum investment term and apply charges for cashing in early. There may also be a minimum investment amount that may range from £1,000 upwards – but is typically set at £10,000.

Types of investment bonds

Investment bonds mainly fall into two categories, onshore and offshore.  The main difference is their tax treatment. In high-level terms, those onshore are subject to UK corporation tax, which is offset by your provider, while offshore bonds are issued from tax havens outside of the UK, for example the Isle of Man, Dublin, Luxembourg or the Channel Islands, where there is little or no tax charged on the funds.

Offshore bonds may also offer a wider choice of funds that could offer a greater degree of risk and potentially rewards to an investor and often require a larger initial investment.

For more detailed information on the differences of onshore and offshore investment bonds please see our investments and tax article.

Other common types of bonds include fixed-rate bonds, corporate bonds and government bonds. Each have their own benefits and risks and the tax situation of each can vary. 

Fund choice

When you invest in a bond you will be allocated a certain number of units in the funds of your choice or those set out by the conditions of the bond. You can choose to invest in a range of funds, a portfolio, or a mixture of both. You can also usually switch between funds within your bond. However, there may be a charge for this.

Each fund will invest in a range of assets, such as fixed interest, shares and property, and the price of your units will normally rise and fall in line with the value of these assets.  If invested in a diverse range of assets then there is potential to weather the storm of any changes in the market that could affect the value of your investment. However, unless you’ve opted for a guarantee, which some investment bonds offer at an extra cost, there is still the potential that you may not get back the amount you invested.

To find out about our investment bonds, see our investment products section.

We are not recommending one course of action over another or providing advice. 

Tax rules require careful consideration and may not reflect your individual circumstances.  The above is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice. For more information please visit gov.uk.

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