Money: Investing for income - Peace of mind if you don't go to penalties

INCOME investors looking for good returns but wary of the risks of the stock market might consider with-profits bonds.

These bonds are offered by more than 20 leading insurance companies, with the minimum investment ranging from pounds 1,000 to pounds 10,000. Your money is invested in the insurer's with-profits fund, which in turn invests in a wide range of shares, gilts and properties.

Every year the insurer will announce a bonus to be paid on your bond. The bonus rate is indirectly based on how well the fund has performed, but if it has done particularly well the insurer will store away some of the profits for future years when the returns may not be so good.

"These bonds are a good choice for cautious investors," says Graham Bates of the independent financial adviser Bates & Partners. "With-profits bonds are suitable for, typically, older people who use them as part of their retirement planning. They are like anchors to your investment portfolio because they are not subjecting you to day-to-day stock market fluctuations."

Investors can withdraw as much income from their bond as they like but may be penalised if they take more than a certain amount each year. Typically, you can withdraw up to 7.5 per cent a year in the first five years without incurring any penalties. The size of the penalty falls as time goes by and after five years there is often none at all.

"Large withdrawals can affect your overall return," warns Mr Bates. "Anyone taking 5 per cent a year should be absolutely fine and should even see some capital growth. If you take more than is being added by the bonuses, your capital is being depleted."

Income payments are tax-free and can be paid monthly, quarterly, half- yearly or annually. Whenever income is required, the bond provider will cash in some of the units in your bond to pay out the income.

Bonus rates vary but typically are around 6.5 per cent net of tax. Often bonds will offer an extra 2 per cent in the first year. Higher bonus rates may also be paid on large investments.

As well as annual bonuses, the funds often pay out a terminal bonus. This can be worth the equivalent of up to another 2.5 per cent a year on the value of the bond. To qualify for this bonus you may have to hold the bond for a minimum period which could be up to five years.

Rarely do with-profits bonds have a fixed term, so you can cash in the bond whenever you like. But watch out for encashment penalties in the first five years. For example, if you cash in Friends Provident's bond in the first two years there is a 7 per cent penalty. This falls to 5 per cent in year three, 3.5 per cent in year four and 2 per cent in year five. After that there is no penalty.

Early encashment can therefore result in you not getting back all your original investment. You should also avoid cashing in when a market value adjustment (MVA) is in place. An insurance company may introduce this device if the stock market is performing very poorly. Cash in during this period and there can be a large penalty to pay.

When choosing a with-profits bond, look at its track record of annual and terminal bonuses. Also look at charges. Many bonds have an initial 5 per cent fee; if they don't then usually there is an annual fee.

You should also look at allocation rates. This is the amount of your money that is invested in units in the bond, and can range from 95 to 102 per cent. A high allocation rate is attractive but is usually offered only to those investing a large amount.

In a recent survey of with- profits bonds by Money Management magazine, Prudential came top for consistent results. Axa Equity & Law produced the top five-year result by turning a pounds 10,000 investment into pounds 16,453, equal to an average annual return of 10.5 per cent. Equitable Life was a top performer over one, two and three years, as was Legal & General.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Suite dreams: the JW Marriott in Venice
travelChic new hotels in 2015
Arts and Entertainment
Sink the Pink's 2013 New Year's Eve party
musicFour of Britain's top DJs give their verdict on how to party into 2015
Finacial products from our partners
Property search

Where to look for returns in 2015: What will happen to stock markets?

The coming year is expected to provide opportunities for patient investors

Pension mortgages: 'The advice I was given was wrong and now I face losing my home'

It's a tale of wrongdoing by financial professionals and buck-passing by the regulators. Simon Read talks to a man who took out a pension mortgage

Simon Read: The point of having protection insurance? The right cover can help reduce your financial concerns at a time of extreme worry

In May Nicola Groves got a massive shock. The 45-year-old mother of two was told, bluntly, that she had breast cancer. "When I heard the words, 'You do have breast cancer and you are going to lose your breast', I felt as if time stood still," she says.

Mark Dampier: Maybe boom, maybe bust, but we'll probably just muddle along

It's that time again when the media looks back over the past year and forward to the next. I am reminded of an old film, The Day the Earth Caught Fire (1961). Near the end of the film a newspaper prints two headlines – which one it uses will depend on whether the world is saved or doomed.

Sainsbury’s sank 7 per cent to 234p; Tesco fell 3.2 per cent to 180.2p ; and Morrisons dropped 5 per cent to 159.9p

Money Insider: Supermarkets: the real challenger banks

The supermarket banks have always excelled at offering simple, no nonsense products, and savings accounts is another area in which they fare well

Pat and Richard Astbury at their home in Norton Canes, Staffordshire. They have benefitted from the Community Energy Project aimed at helping council tenants with their energy bills. They have had solar panels installed.

Locals in Staffordshire to save hundreds after new council-backed project to install solar panels

The sun is shining on people who struggle to heat their homes and it’s thanks to a sense of community

Gross household debt reached a historic high of around 160 per cent of combined incomes in 2007

Simon Read: Give people struggling with debt some breathing space

Struggling people need help, understanding and forbearance, not ill-thought-out pronouncements

A person walks through the City of London during the early morning rush hour in London

Simon Read: Caught up in the scandal about leaks at the regulator

You won’t find me bashing the banks for the sake of it, but sadly they’ve deserved all the criticism that’s been sent their way in recent years

There were around 750,000 victims of mobile phone theft in England and Wales last year, according to official figures

Money alert: Stolen mobile phones

Gillian Guy, chief executive of Citizens Advice: 'The injustice of shock bills for crime victims must end. The Government must stand up for consumers and cap bills from lost or stolen phones at £50'

Indian workers boil sugarcane juice to make jaggery, a traditional cane sugar, at a jaggery plant in Muradnagar, Uttar Pradesh's Ghaziabad district

Mark Dampier: A hot investment story is taking shape as India lets the light in

Stirring the pot: the Indian Government’s reforms of labour rules offer hope of a brighter future for businesses 

An AA patrol man helping a woman whose scooter had broken down.

Bargain hunter: Whisk up those leftovers instead of just throwing them in the bin

Knight of the road, look out: you’ve got a new rival 

How to raise money for charity this Christmas

There are so many ways you can raise money - and awareness - for charity. Rob Griffin explains how easy it is to donate and reap financial rewards

Simon Read: The Chancellor has stamped on an unfair tax. But will the delight of homebuyers mean misery for others?

Were you surprised by the sudden reform of the rules for stamp duty on property purchases? I certainly was. I've been calling for ages for a change in the tax to make it more fair – and, at a stroke, George Osborne did just that on Wednesday in his Autumn Statement.

Santander, whose ads have been fronted by the Olympic gold medallist Jessica Ennis-Hill, was among the banks where there were potential pitfalls with shared licences

Best savings rates are not all they might seem

Consumers can sometimes think they are shopping around for a rewarding account when in one important aspect, writes Samantha Downes, they are not
The sunlit uplands: switching out of a final salary pension may seem like madness, but there could be cases where it makes sense

Gold-plated pensions – the key to retirement freedom?

With some people are weighing up whether they will be better off cashing in their final salary pension next spring, Samantha Downes asks the experts

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

    Aren’t you glad you didn’t say that?

    The worst wince-and-look-away quotes of the year
    Hollande's vanity project is on a high-speed track to the middle of nowhere

    Vanity project on a high-speed track to nowhere

    France’s TGV network has become mired in controversy
    Sports Quiz of the Year

    Sports Quiz of the Year

    So, how closely were you paying attention during 2014?
    Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

    Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

    From Armstrong and Miller to Pointless
    Sanchez helps Gunners hold on after Giroud's moment of madness

    Sanchez helps Gunners hold on

    Olivier Giroud's moment of madness nearly costs them
    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect