Investment bonds are investment products offered by life companies and are usually made available for lump-sum investments. You can choose how that money is invested from a range of options that combine a variety of different asset classes within the one fund. Life companies offer external links to fund management houses, increasing your scope to mix, match and specialise within your portfolio.
When you take out an investment bond, your income and gains within the bond are subject to basic rate tax. Therefore, if you are a basic rate taxpayer, you will pay no further tax on any gains. If you are a higher rate taxpayer, however, you will pay an additional 20% on the total profit when the bond is cashed in.
Nevertheless, there are ways to mitigate this. For example, under income tax deferral rules, you can withdraw up to 5% of the investment’s initial value every year for up to 20 years – i.e., up to 100% of the initial investment – without immediately becoming liable for additional tax.
This postponement of the tax liability can be particularly advantageous if you are a higher-rate taxpayer now, but expect to become a basic rate taxpayer in future. When the investment bond is finally cashed in, you become liable for the higher rate tax bill. However, if you postpone this encashment until you are paying basic rate tax, you could actually end up with no further liability at all.
