Investment Bonds

Investment Bonds

Investment bonds are life insurance policies where you invest a lump sum in a variety of available funds. Some investment bonds run for a fixed term, others have no set investment term. When you cash investment bonds in, how much you get back depends on how well – or how badly – the investment has done.

When might investment bonds be for you?

  • You want to invest a lump sum – usually at least £5,000
  • You can tie up your money for at least five years
  • You are comfortable with the fact that the value of your investment can go down as well as up and you might get back less than you invested

How investment bonds work

You invest a lump sum – the minimum is usually between £5,000 and £10,000.

  • Most investment bonds are whole of life. There is no minimum term, usually, although surrender penalties might apply in the early years.
  • Usually you or your adviser has a choice of funds to invest the money into.
  • At surrender or on death (or if not a whole of life bond at the end of the term), a lump sum will be paid out. The amount depends on the bond’s terms and conditions and might depend on investment performance.
  • Some investment bonds might guarantee your capital or your returns. These guarantees usually involve a counterparty. If so they carry the risk of counterparty failure.

How your money is invested

You have a choice of two types of funds – with-profits or unit-linked.

Both have the same tax rules where tax is paid on both growth and income accrued in the fund by the insurer.

Access to your money

  • You can usually withdraw some or all your money whenever you need to, but a surrender penalty might apply if you do so in the first few years. There might also be a tax charge. If you think you might want access to your money early, consider alternatives.
  • Investment bonds also allow you to make regular withdrawals each year up to a specified limit. Withdrawals of up to 5% each year of the amount that you invested can be taken without triggering any immediate tax liability. However, the tax is in effect only deferred as, when the bond is cashed in, withdrawals will be added to any profit made and taxed as income in that tax year.
  • Always look at policy conditions to work out what charges might apply to full or partial withdrawals.


  • There might be charges to pay when you take out the bond.
  • Choosing a bond that guarantees that you won’t lose money, could mean you might pay more in charges.
  • Switching between an insurer’s investment funds is usually free, but you might be charged if you switch frequently.
  • You might have to pay a charge if you cash in within the first few years.

Tax on investment bonds

  • All gains and income earned within an investment bond are taxed at 20% and paid directly out of the investment bond.
  • Withdrawals of up to 5% a year are allowed for up to 20 years without incurring an additional tax charge.
  • If you don’t use your 5% allowance each year, the allowance is carried over to the following year i.e. if you make no withdrawals in year one, you could draw up to 10% the following year without incurring a tax liability.
  • So, if you’re a higher rate or additional rate taxpayer, paying 40% or 45% tax on income in the current tax year, an investment bond can minimise your income tax bill.
  • However, your tax bill does not disappear entirely. Instead, the tax is deferred and any additional tax due will be payable at the time you cash in the bond, or when it matures.
  • All capital gains are treated as income at this point. Although tax at 20% has already been deducted, you might have an additional income tax bill if your gains push your income over the higher or additional rate tax threshold in the year they mature.