Insurance Bonds


Insurance bonds, sometimes referred to as 'investment bonds' are single-premium savings contracts issued by life insurance companies. They are collective investments . Just like unit trusts, the investor hands over his money to a fund manager who uses his expertise to make the investment grow as quickly as possible.

An increase - or decrease - in the value of the investment fund is reflected in an increase or decrease in the value of the investor's units.

There are key differences between insurance bonds and unit trusts, so prospective investors need to make their choice carefully with the help of an independent financial adviser. In the past, some financial advisers have preferred to sell insurance bonds because they have traditionally paid a higher commission (often 5%) compared with unit trusts which pay less (often 3%).

Insurance bonds differ from unit trusts in several ways but principally in the area of taxation. With Insurance bonds, most of the taxation is already taken care of before the investor receives any return. In other words, the taxation of a bond takes place within the fund - the insurance company pays both income and Capital gains tax (CGT).

For basic rate taxpayers, there will be no further tax to pay on any gains from an Insurance Bond. Higher rate taxpayers will face a further tax burden, but even here the tax due can be deferred. Bonds are not suitable for non-taxpayers as the tax deducted within the fund cannot be recovered.

Bonds can offer useful income flexibility within a lower risk environment, and can be particularly useful in planning Inheritance Tax (IHT) because they can be written under trust. In fact you can combine all the elements - have a lower risk bond which produces income whilst helping your CGT position.

For added tax flexibility, you may choose to look at offshore insurance bonds. These allow you to 'roll up' the income gross of tax. But remember, you may be taking added risk if you invest offshore because you will fall outside the UK's investor protection legislation. You should also remember that when these bonds are bought back on-shore, they will be liable to normal taxation.

Insurance bonds can be broken down into four categories.

  1. Managed Bonds
  2. With-Profits Bonds
  3. Equity Bonds
  4. Distribution Bonds