With Profit Bonds

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With Profit Bonds

With profit investment bonds - still worth considering? With-profits bonds are lump sum investments, usually with a life span of 10 to 20 years, and often have a life cover element to them.

They can be popular with investors wanting a regular tax-free income from an investment, usually up to five percent of the original value.

Low risk investments

Although often thought of as low risk investments, with-profits bonds can carry some risk because the original investment - which is pooled together with other investors - is usually invested in a wide range of assets, be they gilts (low risk bonds), corporate bonds (higher risk bonds) and even property. But the attraction for many of with-profits bonds is that because they are invested in a range of assets they are relatively safe (though there is no guarantee you will get all your capital back).

Fund profits

The with-profits element of this type of investment comes from the profit a fund makes over a year. If the fund does well, then a bonus - the profit made on the investment - is paid to policy holders.

Profits returned to policy holders can be modest in good years because a company will want to sustain the annual bonus, if it can, in poor performing years too. This is known as the smoothing effect.

Do be aware that with-profits bonds are very much long-term investment vehicles, and if you try to cancel the bond in the first few years of its policy, you may be stung by early surrender penalties, as well as what is called a Market Value Adjustment (MVA).

You also may receive back less than you invested, due to the costs the company will incur from any investors bailing out before the bond finally matures. Some charges can be significant.