Attractive option for the cautious

Protect your investment from sudden stock market slumps

With-profits bonds may not be the most tax-efficient investment available but hidden away in their sometimes complicated rules is a tax break that will appeal to many, particularly higher-rate taxpayers and those looking for income.

With-profits bonds may not be the most tax-efficient investment available but hidden away in their sometimes complicated rules is a tax break that will appeal to many, particularly higher-rate taxpayers and those looking for income.

With-profits bonds are a type of investment bond sold by insurance companies. They allow you to tap into the high returns offered by the stock market while protecting your investment against a sudden slump. Each year a bond will payout an annual bonus, as well as a final, larger terminal bonus.

This makes for an attractive prospect for cautious investors, but only those who pay tax, says Patrick Connolly, director of Chartwell Investment Management. "Proceeds are paid net of basic rate tax at 23 per cent and this cannot be reclaimed. If you don't pay tax, forget about them."

If you are among the majority of us who are under Hector's fiscal thumb, the investment decision is more complex.

The tax advantage they offer comes in the form of an Inland Revenue rule that allows bond holders to take up to five per cent of the value of their investment as income each year for 20 years and pay no immediate tax on the proceeds.

All taxpayers benefit, although higher-rate taxpayers inevitably benefit more. This tax benefit is not as attractive as those offered by other tax-free savings vehicles such as individual savings accounts (ISAs). With-profits bonds cannot be taken as an ISA.

Cautious investors looking to save tax should also consider National Savings Certificates, low risk investments which offer returns free of all income and capital gains tax.

Philippa Gee, an independent financial adviser in Shrewsbury, says less aggressive investors looking for steady growth should definitely consider with-profits bonds. "Combining a with-profits bond with other equity investments should give you a good spread of risk within your portfolio."

She says that when picking an investment you should not make your choice solely on the tax benefits on offer. Many factors come into play, including your age, the length of time you can invest and the level of risk you are willing to accept.

Investors most likely to consider with-profits bonds are either looking for income now, or will need income in the near future. Many transfer the returns from more risky equity investments to with-profits bonds in the run up to retirement. "With-profits bonds have several advantages. They are open ended with no fixed maturity date. You can take an income if you want, or allow it to grow."

A number of insurance companies have just announced their latest annual bonus rates, most of them showing a small fall. Scottish Widows has kept its steady at 5 per cent, but Royal & Sun Alliance has cut its bonus from 5.5 to 5 per cent, Friends Provident from 6 to 5.25 per cent, CGU Life from 6.25 to 5.75 per cent and Norwich Union from 5.5 to 5 per cent.

This continues the trend to falling annual bonus rates seen in recent years, something that has not hit the popularity of with-profits bonds, as rates on other low-risk investments such as building society accounts, guaranteed income bonds and National Savings Certificates have also fallen. In 1997 sales totalled £5.4 billion, which rose to £6.8 billion in 1998. Early estimates put sales at £8.8 billion last year.

As a guide to current terminal bonus levels, the UK's most popular bond, the Prudence Bond, from Prudential, pays 5.25 per cent annually with a 2.75 per cent terminal bonus for the 1999/2000 financial year, giving a total return of 8 per cent.

Some alternative sources of investment income can seem more attractive by comparison. Ms Gee says investors can earn up to 9 per cent through a high yielding corporate bond but adds: "You can get a higher annual income but you are taking a greater risk with your original investment." John Hutton-Attenborough, senior financial planning consultant with Berry, Birch & Noble, favours the Prudence Bond for its consistent track record. Other favourites include Scottish Equitable, Clerical Medical and NPI.

One final thought. With-profits bonds pay advisers high levels of commission, up to 5 per cent. You can reduce this by buying through an 'execution-only' discount broker.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Ashdown Group: Marketing Services Manager - (communications, testing, DM)

    £32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

    Guru Careers: Finance Account Manager

    £Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    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
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas