Today, the most popular investment, without doubt, is a personal equity plan. PEPs allow savers the opportunity for growth and income, all in a tax-free wrapper.
But there is one - currently unsung - savings product that has attracted more than pounds 3bn of savers' money. It has generally succeeded in growing ahead of inflation while offering a reasonable income. And apart from a cold suffered in 1994, it has proved a generally safe haven for funds.
Distribution bonds have proved a popular option for almost 200,000 savers in the past 15 years.
Essentially, they are a form of unit-linked savings scheme, with a generally conservative investment strategy. Funds are spread across a range of equities, gilts and other fixed-interest investments. Income from bonds, usually paid on two distribution dates each year, is free of capital gains and income tax at the basic rate.
Among the most popular distribution bonds are those from Sun Life, Prudential, Allied Dunbar, Skandia, Scottish Provident and Axa Equity & Law.
While generally considered a safer investment, different distribution funds will have varying investment strategies and risks attached to them. In turn, the annual income paid can vary between 4 and 7 per cent a year, depending on the bond. Sales of the bonds have waxed and waned compared with other products on the market.
Andrew Jones, a partner at the Aaron Partnership, a firm of independent financial advisers in Milton Keynes, says: "They were very popular until mid-1994. The problem came in that year when both equity and bond markets fell in the same year. Given that these products were marketed as low- risk funds, it made a lot of people nervous." Since then, many investors have preferred other products, including with-profit bonds. But they have greater exposure to equities than distribution bonds.
Unlike PEPs, distribution bonds are the subject of a "tax-drag" effect on the life company fund itself. Higher-rate taxpayers can currently withdraw up to 5 per cent of the initial capital value each year, without paying any tax. They pay a further 16 per cent (17 per cent after 5 April) on sums above that 5 per cent.
For many savers, PEPs are a more sensible option, particularly given that some companies, including Sun Life, have set up plans under a tax- free wrapper which replicate faithfully the fund strategy of a distribution bond.
In fact, some financial advisers believe the bonds are not a useful investment tool at all. One, who refuses to be named, argues: "The particular mix of funds is one which can just as easily be set up by any adviser through the right portfolio of investment trusts or PEPs, which may have lower charges.
"What worries me is that these are nice little commission-earners for advisers and they may put a client into a distribution bond before any other product."
Mr Jones argues that distribution bonds can still be useful: "If you have invested up to your PEP limit, a distribution bond may offer an additional opportunity for relatively risk-free investment."
Many advisers, including the Aaron Partnership, are prepared to enhance bonds through commission rebating or by obtaining better terms from the life company.
The company recommends that bonds are a better haven for spare cash than annuity products in retirement, as a supplement for those who have recently retired.
Despite the keen competition among bond providers, the company all the others still want to beat is Sun Life, whose fund was set up in 1979. The fund invests about 40 per cent in UK equities, a further 40 per cent in fixed-interest stocks and the remainder in cash or other convertibles.
It does not invest either in property or overseas equities, claiming this policy makes the fund more secure. Although it has ridden relatively unscathed through most market downturns, including the October 1987 crash or the dip after the Iraqi invasion of Kuwait in August 1990, the fund caught a cold in the 1994 downturn along with all others.
The key for distribution bonds, as with most investments, is to discuss the matter fully with an independent adviser first. But for some, these funds may be the answer to the age-old conundrum of how to provide safety, growth and reasonable income.
Copies of the Aaron Partnership guide to distribution bonds are available, price pounds 2 (inc P&P), by writing to Shelton House, High Street, Woburn Sands, Milton Keynes, MK17 8SD.Reuse content