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

News
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
science
News
Richard Dawkins dedicated his book 'The Greatest Show on Earth' to Josh Timonen
newsThat's Richard Dawkins on babies with Down Syndrome
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
Extras
indybest
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

    AIFMD Business Analyst / Consultant - Investment Management

    £450 - £600 per day: Harrington Starr: AIFMD Business Analyst / Consultant - I...

    Business Analyst Solvency II SME (Pillar 1, 2 & 3) Insurance

    £450 - £600 per day: Harrington Starr: Business Analyst Solvency II SME (Pilla...

    Manager - SAS - Data Warehouse - Banking

    £350 - £365 per day: Orgtel: Manager, SAS, Data Warehouse, Banking, Bristol - ...

    SQL DBA/Developer

    £500 per day: Harrington Starr: SQL DBA/Developer
 SQL, C#, VBA, Linux, SQL Se...

    Day In a Page

    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
    Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

    'Lack of ethnic minority and black faces on TV is weird'

    Culture Minister Ed Vaizey calls for immediate action to address the problem
    Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

    Josephine Dickinson: 'How I discovered a new world of sound'

    After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
    Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

    Greggs gives lesson in crisis management

    After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
    Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

    Matthew McConaughey sings the praises of bumbags

    Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
    7 best quadcopters and drones

    Flying fun: 7 best quadcopters and drones

    From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
    Andy Murray: I quit while I’m ahead too often

    Andy Murray: I quit while I’m ahead too often

    British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
    Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

    Lauded therapist still in limbo as battle to stay in Britain drags on

    Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
    Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

    Lewis Fry Richardson's weather forecasts changed the world...

    But could his predictions of war do the same?