Investment Bonds are usually a packaged investment product offered by Life and Pension companies.  They offer the advantage of being straightforward in terms of administration and management, and an investor can withdraw up to 5% of the initial investment amount each year, in most cases without paying any tax at that point.  They can be particularly useful as investments within a trust.

The rest of this section discusses further the merits and otherwise of Investment Bonds.  Many of the tax rules are quite complicated, but they are an important feature of the investment.

An Investment Bond is a wrapper through which one can invest in a very wide range of collective funds.  They are offered by the majority of UK Life Assurance companies, and can play a useful role in most portfolios.  The funds within an Investment Bond are often known as "life funds".  You can usually switch between funds at no cost, and with no capital gains tax implications.

Taxation

Unlike a unit trust, an onshore life fund must pay basic rate tax each year on the income and gains it has earned.  This payment of tax has a small negative effect on the growth of the fund each year - a unit trust would be worth slightly more at the end of a year than an identically managed life fund.  The longer the fund is held, the larger this difference becomes.

So why put your money in Investment Bonds rather than unit trusts?  Well, if you are a higher rate taxpayer, any income and capital gains you make are taxable at the higher rate, but in an Investment Bond, you only pay basic rate tax, or perhaps none at all if the bond is offshore.

Also, you can withdraw up to 5% of your original investment each year for up to 20 years, with no further tax to pay at that point for an onshore bond, even if you are a higher rate taxpayer (although you may have to pay tax later if you withdraw more in the same year or cash the whole investment in).

Investment Bonds give a neatly packaged, easily managed investment solution.  However, if you have all of your investments in this type of wrapper, you could be paying more tax than necessary.  For example, you don't have the opportunity to use your annual allowance for Capital Gains Tax.

That said, there are good funds that are only available through investment bonds, and quality has to be the main reason for any investment decision.

Trusts

Investment Bonds can be quite suitable for investing money within a trust.  Most trusts are now taxable at the higher rate, and have a smaller capital gains tax allowance than an individual.  This makes the tax treatment of an Investment Bond quite attractive.

Also, accounting for capital gains and income within a trust can be an additional unwanted burden on the Trustees.

None of the above is intended to constitute advice to invest in Investment Bonds.  Specific recommendations will only be made following a thorough review of your circumstances.