Onshore / Offshore Bonds

With an onshore bond, tax is payable on gains made (and investment income received) from the underlying investments of the life fund(s) invested in, whereas with an offshore bond no income or Capital Gains Tax is payable on the underlying life fund investments.

What are investment bonds?

Investment bonds are a type of policy that can be used to grow your savings, or initial investment, over a prolonged period of time. They can be tax-efficient investment option and can be used as an alternative to traditional term life insurance policies, especially if you have several thousand pounds right now you want to grow.

But as with all investments, performance can vary and the amount you put it can go down as well as up – although some policies will guarantee you the return of your initial investment following your death.

There’s ultimately more risk and uncertainty involved with an investment bond than a traditional life insurance policy, but they offer flexibility, tax incentives, and potential for high returns that may.

How investment bonds work

Investment bonds allow you to make a single initial deposit, this lump sum is then invested across a range of funds and shares. Some policies allow you to pick the funds in which your money is invested while others are fully managed for you.

These investment bonds don’t expire. When you die – whenever you die – the value of the bond at that time is paid out to your beneficiaries. Additionally, with some policies, you can withdraw some or all of the money as income during your life, although a surrender penalty may exist during the first few years of the policy and there may be tax implications.

What types of investment bond are there?

There are two types of investment bonds, based on the way the money is invested. They come with different levels of risk and potential for return.

  • with-profits: benefits are indirectly affected by investment performance. This is the most common type of investment product sold by insurance providers. The initial sum assured invested is topped up annually by bonuses, based on the performance of the investment.

  • unit-linkedbenefits are directly affected by investment performance. The single payment premium buys units in the fund of the investor’s choice. The policy’s value depends on the performance of the fund, or funds, to which it is linked. These policies come with the potential for higher rates of return, but a collapse in the value of the fund could wipe out your investment and any potential payout after your death.

Some policies come with a guarantee of your initial invested capital or returns, meaning you won’t get back less than you put in. These policies often come with higher fees to the provider, however.

Can you withdraw money from an investment bond?

There’s typically a surrender value of your bond, although you might not be able to recoup it within the first few years of the policy. Investment bonds are intended to be a medium- or long-term investments and you’ll face penalties for trying to cash them out early. There also might be tax implications of doing so.

However, investment bonds will generally allow you to make annual withdrawals of their value, up to a certain amount. However, if your yearly withdrawals exceed the fund’s rate of growth, you’ll be depleting the initial value of your investment.

You can withdraw up to 5% of their value each year for up to 20 years without being liable for immediate taxation. Any withdrawal allowance not used one year can be rolled over to the following year. If you don’t withdraw any of the bond’s value for two years you can then cash out 15% of the value in the third year, for instance.

However, that tax liability doesn’t just vanish. It’s just deferred and when the bond is cashed in, those withdrawals over the year will be added to the profit made and taxed as income in that tax year. But that deferral might be particularly attractive to high rate taxpayers, who can delay payment until they fall into a lower tax bracket, say in retirement or in a lean year, or for investors who have already used their annual capital gains tax allowance.

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