Fixed Income investments

How do Investment Bonds Work?

· 6 min read

Making your money work for you is one of the most satisfying aspects of personal finance. Investing your cash is a long-term strategy for money growth, and investment bonds are one option. However, with so many options available, where do you start?


Making your money work for you is one of the most satisfying aspects of personal finance. Investing your cash is a long-term strategy for money growth, and investment bonds are one option. However, with so many options available, where do you start?

What Is an Investment Bond?

Investment bonds are a type of life insurance that you pay into with a single, large lump sum of cash. Investment bonds do not have monthly payments like typical life insurance policies.

Your money is invested into various funds and shared by the investment bond provider. They carefully manage the funds, aiming to create a return on your investment. For the set period of your investment bond, you typically will not be able to withdraw your money without incurring early repayment fees.

What Makes an Investment Bond Different to Other Types of Investment?

Investment bonds are different from other types of investment. Unlike a life insurance policy, they do not ‘expire’ after the end of the agreed period. If you die and you have a will in place, your investment bond passes to your identified beneficiaries. They can treat the investment bond as their own and make withdrawments, or cash it in, if the bond has matured. If you die and do not have a will in place, your investment bond passes to your next of kin as part of your estate.

There are two types of investment bonds: onshore and offshore. These two differ in their tax structure so you should do careful planning and research.

Onshore Investment Bond

An onshore investment bond is an investment made inside the UK. This means the UK’s tax structure will apply to any withdrawals and maturation of the bonds. An onshore investment bond can be useful for tax planning. It may also reduce the risk around where your funds are being used for investment.

Offshore Investment Bond

An offshore investment bond is an investment made in a legal tax scheme outside the UK, such as in Guernsey or the Isle of Man. This offers you greater control over how and when the tax is paid on your withdrawals and maturation of the funds.

An additional benefit of offshore investment bonds is the low tax, so funds can be more likely to see higher growth. However, if the funds are transferred back into the UK, they will be subject to UK taxes. Therefore, it’s essential to consider this when investing in offshore investment bonds.

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How Safe Are Bonds as an Investment?

As with any investment, there is some risk associated. Your investment bonds will remain protected aside from the rare event that the insurance company goes bankrupt. You will not be able to claim back your investment on these grounds.

The type of investment bond you choose will carry risks. It's essential to be fully informed and understand the risks and gains associated.

How Do Investment Bonds Work?

Investment bonds will vary depending upon their provider. However, in summary, they work as a lump sum investment for amounts between £5,000 and £10,000. Many investment bonds have a minimum term (generally from 5 to 20 years). They can also be for the whole life of the person investing. The amount paid out at the end will depend on the funds you choose to invest in. Some investment bonds will have a guarantee of returning what you invested. However, these will include a counterparty. Other investment bonds may not be able to guarantee your original investment back.

During the period of the investment bond, you can access your money, though a charge may be applied. You can often withdraw 5% of the value of the money you invested without needing to pay tax on that amount immediately. How frequently you can withdraw depends on your agreement, but this is typically allowed once a year. It is essential to be mindful that any withdrawals will be taxed in future when the bond is fully cashed in.

What Happens to An Investment Bond After 20 Years?

If no withdrawals have been made during the 20 years, you will get back your total investment, plus whatever extra your investment has made. You can choose to reinvest this money in another investment bond or keep your funds.

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You will need to pay tax on what you have earned from your investment. This amount will depend on your current income and other factors.

Can I Add More Money to My Investment Bond?

You may wish to add more funds to your investment bond over time. Some providers offer very flexible terms. But this does depend on each unique provider. It’s worthwhile asking detailed questions about this to ensure you’re fully informed.

  • What are the risks associated with my investment bond?
  • How do you ensure your investments are made with your investment partners are adequately protected?
  • Do you have proof your trading takes place legally and ethically?
  • Can you provide detailed terms and conditions about your investment bond?

How Are Investment Bonds Taxed?

Typically, the provider of the bond will pay tax on the capital gains and income from your bond during the period that your funds are invested. However, you will be taxed on any withdrawals or maturation of the investment bond. The amount of tax you pay will depend on your unique situation. If you are a higher-rate tax payer, your investment bond could be taxed at a higher rate when you cash in.

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You can withdraw up to 5% of the value of your original investment per year without paying tax straight away. However, you will still have to pay the tax on the amount withdrawn at the end of the term. Any unused withdrawal allowances can be carried forward.

Are Investment Bonds Worth It?

Overall, investment bonds are simply another form of investment. They have different features that may be appealing, especially when it comes to tax planning and wealth management. The withdrawal feature can help with cash flow without paying tax straight away. However, it is essential to consider what financial position you will be in when you wish to cash in an investment bond.

As with all types of investment, there is a risk associated, so it’s vital to consult an experienced financial adviser or planner before going ahead.

Victoria McDonagh
Victoria McDonagh
Victoria is a freelance writer with several years of experience writing in the finance sector about various topics. She enjoys writing novels and short stories in her free time and spending long afternoons reading with her cat.
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