Investment bonds aim to grow your money over time, usually including life insurance. But like all investing, there's a risk its value could go up or down. Here's all you need to know.
How do investment bonds work?
You give a lump sum of money to a life insurance company. They then invest it for you, usually in a range of funds.
Over time, your money might grow. You might get some back each year, but you usually can’t take out all the money for a while, usually five or ten years.
When you cash it in later, you might have to pay some tax on the money you’ve made. You can find out more about how investment bonds are taxedOpens in a new window on the Aviva website.
Investment bonds might be suitable for you if:
- you’re okay with locking your money away for a while and don’t need access to it immediately
- you’re comfortable with taking some risks.
Investment bonds might not be right for you if:
- you can’t afford to risk losing any of your initial investment
- you might need the money back soon, or
- you’re relying solely on them to cover your care expenses.
What are the pros and cons of investment bonds?
Pros
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Potential for higher returns compared to cash savings accounts, but it’s important to compare interest rates.
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They’re considered safer than many other investment options, although they still carry some risk.
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Up to 5% of the original investment amount can be withdrawn each year without immediate Income Tax liability, providing a regular income.
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Investing in a range of funds can help spread risk and reduce market volatility.
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Flexibility: usually, you can switch between funds free of charge, although frequent switches may incur fees.
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Depending on the size of your investment, the returns can be useful to provide a regular income to pay for care fees and leaving an inheritance.
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Money tied up in investment bonds will usually be excluded from the means test to work out how much you’ll pay towards your care. But if you try to take out money from investment bonds to avoid paying for care, your council will consider it as trying to hide assets.
Cons
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Typically, money is tied up for at least five years and early cash-ins might result in significant penalties.
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Returns are not guaranteed, and the value of the bonds can fluctuate, potentially not covering care costs.
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Various charges apply, including initial, annual and cash-in charges.
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Tax implications: while withdrawals are tax-deferred, they’re taxed as income in the year they’re cashed in, potentially reducing overall returns.
What are the risks of investment bonds?
As with any investment, the value of investment bonds can go up or down.
While you might make more than with a savings account, there’s also a chance of losing money.
Some investment bonds guarantee you won’t lose your initial investment, but they usually come with higher fees.
Get independent financial advice
It’s important to seek independent financial advice to discuss the best option for your situation before deciding.
If you choose to go ahead after seeking advice, you can buy investment bonds either through a financial adviser, or directly from an insurance company.
