Capital Investment Bonds

Investment bonds, including so-called capital investment bonds, allow you to invest a lump sum with an insurance company. You get a certain amount of life cover, but the rest is invested in a with-profits fund or ‘insured fund’ run by the insurance company. In fact, some companies offer as many as 150 funds to choose from. Investment bonds also offer some tax benefits - they allow you to withdraw 5% of your investment each year with no immediate tax liability.

Medium to Long Term

The investment timescale is intended to be medium to long term, and there will probably be a minimum investment of £5,000 or even £10,000. Depending on the policy, you may be able to top up the bond with additional payments at any time, as well as one-off withdrawals. You may be able to invest in as many of the funds on offer as you like and switch from one fund to another, and your tax liability could be deferred for up to 20 years. If you don’t use your full 5% allowance in a particular policy year, you can carry it forward until you have used up the whole allowance. 

Withdrawals

Investment bonds should not be considered for cash you might need in the short-term, as withdrawing more than the annual 5% limit triggers tax and could also result in high charges.

If you are looking to draw down income from an investment bond, a distribution bond may be a more suitable choice. Alternatively, if you're thinking about moving abroad, even for a relatively short time, in the future, you may want to consider the tax advantages of offshore bonds.

Like other insurance-backed bonds, the life insurance element should mean that the value of the bond is paid out should the bondholder die (though all relevant parties should be covered).

Charges

However investment bonds also come with a wealth warning. Firstly, they have traditionally been the most lucrative product for independent advisers or banks to recommend, as insurers pay big commissions for their sale. Secondly, management charges can wipe out 1% or more of your fund's value every year, which mounts up. Thirdly, your investment may also attract an initial charge of up to 5%, making a major dent in your lump sum. This means that capital investment bonds need to be considered very carefully, as the overall returns are not guaranteed. There are other options which may work out cheaper. Stocks and shares Isas can give access to the same or similar funds offered through bonds and come with additional tax incentives. They can also be bought on a cheaper basis through discount brokers or fund platforms.