top of page

What is an Investment Bond?

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?

  • How investment bonds work

  • Risk and return

  • Access to your money

  • Charges

  • Are investment bonds safe and secure?

  • Tax on investment bonds

  • Where to get investment bonds

  • If things go wrong

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.

Risk and return

  • Some investments offer a guarantee that you won’t get back less than you originally invested.

  • By choosing a bond that allows you to invest in a variety of investment funds and switch funds easily you might weather the ups and downs of the market better. Find out more about diversifying.

  • Because there’s an element of life assurance, your investment bond policy might pay out slightly more than the value of the fund if you die during its term.

Access to your money

  • You can usually withdraw some or all of 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: Popular investments at a glance.

  • 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.

Insurers often offer a range of charging structures. Make sure you are happy and understand how your money will be charged

Are investment bonds safe and secure?

Your money is secure except in the unlikely event of the insurance company going bust.

You cannot claim compensation simply because the value of your investment falls.

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 in a given 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.

You might be able to avoid this by using a method known as ‘top slicing’.

Top slicing works by dividing your profit over the lifetime of your bond (including withdrawals) by the number of years the bond has been held.

If the resulting figure, when added to your other income for the tax year, is below the higher-rate tax threshold, there is no extra tax to pay.

However, if the top-sliced profits still push you over the higher rate tax threshold for the year, then additional tax must be paid on the entire gain.

Where to get investment bonds

You can buy investment bonds through a financial adviser or directly from an insurance company.

If you’re not sure whether an investment bond fits your needs, it’s a good idea to talk to an Independent Financial Adviser (IFA).

If things go wrong

If you’re unhappy with the service you get or you want to make a complaint, read Sort out a money problem or make a complaint.

8 views0 comments

Recent Posts

See All


bottom of page