Distribution Bonds

Distribution bonds are one variant of the investment bonds offered by life insurance firms. They are intended to provide income with minimal affects on your original investment.

They aim to ensure that any tax-free payout - up to 5% and usually in the form of dividends - don't deplete your original investment too much, thereby giving your capital a good chance to grow in the long-term. As with shares however, the dividends can be reinvested to fuel capital growth.

Distribution bonds also combine two different asset classes - equities and bonds - inside one investment wrapper.

UK equities

Distribution bonds tend to have a higher amount invested in UK stocks and shares  - up to 60 percent in some cases - than other types of bonds, so they may be riskier. Nevertheless, distribution bonds normally have a strong income flow to them from reliable investments to bolster their security. With equities making up the major portion of the investment, the potential for growth over the long term is boosted. The minimum investment amount in a distribution bond is usually £5,000, but if you want regular income payments then you may have to invest £10,000 or more (there's no limit to the overall amount you can invest).  Depending on how well the bond performs, income from distribution bonds will fluctuate, though hopefully any changes shouldn't be too dramatic.

Withdrawals

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. 

Investment bonds should not be considered for cash you might need within five years, because withdrawing more than the annual 5% limit will result in tax liabilities and potentially nasty charges.

Distribution bonds are very much long-term investments, due to their large equity make-up, and should be treated as such.

Charges

Investment charges can shave 1% or more off your fund's value every year and your investment may also attract an initial fee of up to 5%, making a major dent in your lump sum. This also has to be weighed up against the fact that investment returns are never guaranteed. The higher your charges are, the harder your bond will have to work. A less risky alternative would stocks and shares Isas - you can find more info about this in our guide to Isas. These Isas can give access to the same or similar funds offered through bonds, and might work out cheaper if bought through a discount broker or fund platform.