What is an investment bond? | Lloyds Bank (2024)

FAQs

What is an investment bond? | Lloyds Bank? ›

An investment bond is a single-premium life insurance policy that can be used to hold investments in a tax-efficient manner. As with any investment, the value of the bond may go up or down depending on how well your investments perform. The investor might not get back their initial investment.

An investment bond gives you the potential for medium to long-term growth on your money, over 5-10 years or more, along with fund management expertise. You also get access to a mixture of funds, which are looked after by professional investment managers.

Historically, bonds are less volatile than stocks.

Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.

Cash is a low-risk investment. A bank repays it on demand in most cases and even pays you interest. When you invest in a bond, you're effectively lending money to the provider. Your money is at risk because there's a chance that the issuer won't be able to make repayments.

Although they may not necessarily provide the biggest returns, bonds are considered a reliable investment tool. That's because they are known to provide regular income. But they are also considered to be a stable and sound way to invest your money. That doesn't mean they don't come with their own risks.

If you cash in part of your bond as a one-off withdrawal, you can take advantage of the 5% allowance. This means that in each policy year you can withdraw 5% of the money you invested, without any immediate liability to income tax. This is the case even if the bond is showing an investment gain.

All bonds carry some degree of "credit risk," or the risk that the bond issuer may default on one or more payments before the bond reaches maturity. In the event of a default, you may lose some or all of the income you were entitled to, and even some or all of principal amount invested.

These are the risks of holding bonds: Risk #1: When interest rates fall, bond prices rise. Risk #2: Having to reinvest proceeds at a lower rate than what the funds were previously earning. Risk #3: When inflation increases dramatically, bonds can have a negative rate of return.

The disadvantages of bond funds include higher management fees, the uncertainty created with tax bills, and exposure to interest rate changes.

Are bonds or CDs better? ›

Bonds often offer higher interest rates than CDs, which may be appealing to those looking for a higher profit potential. Unlike CDs, where interest may accumulate and only be paid at maturity, bonds often provide ongoing interest payments, usually at monthly or quarterly intervals.

The main ways to lose money on bonds include price decreases due to interest rate increases, default or bankruptcy of the bond issuer, call risk, reinvestment risk, and inflation risk.

U.S. savings bonds are a long-term choice and are appropriate for savers looking at a 20-year or 30-year time horizon. Treasury bills are a short-term alternative, maturing in a year or less. Treasury notes are at the midpoint, maturing in two to 10 years.

And, more importantly, are they the right choice for your needs? Traditional savings and money market accounts allow you to earn interest and access your money right when you need it. Bonds, on the other hand, grow slowly in value and are worth the most after 20 to 30 years.

This is a rule in tax law which allows investors to withdraw up to 5% of their investment into a bond, each policy year, without incurring an immediate tax charge.

Investment bonds offer a favourable tax status as long as your additional investments do not exceed 125% of the previous year's contributions. For example, if you invest $10,000 in year one, you can invest $12,500 (125% x 10,000) in year two, $15,625 (125% x $12,500) in year 3, and so forth.

Withdrawals after the 5% per annum allowance has been used for 20 years. If an investment bond has been paying a 5% per annum income for 20 years, HMRC deem this to be a return of the investor's original capital and any additional withdrawals would be considered chargeable events each time they are made.

There are two ways to make money on bonds: through interest payments and selling a bond for more than you paid. With most bonds, you'll get regular interest payments while you hold the bond. Most bonds have a fixed interest rate. Or, a fee you get to lend it.…