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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
The guide, since withdrawn, used illustrations and text to help people understand the court process (Getty)
newsMinistry of Justice gets law 'terribly wrong' in its guide to courts
News
Bobbi Kristina Brown with her mother Whitney Houston in 2011
people
News
Starting the day with a three-egg omelette could make people more charitable, according to new research
scienceFeed someone a big omelette, and they may give twice as much, thanks to a compound in the eggs
News
Top Gun actor Val Kilmer lost his small claims court battle in Van Nuys with the landlord of his Malibu mansion to get back his deposit after wallpapering over the kitchen cabinets
people
PROMOTED VIDEO
News
The actress Geraldine McEwan was perhaps best known for playing Agatha Christie's detective, Miss Marple (Rex)
peopleShe won a Bafta in 1991 for her role in Oranges Are Not The Only Fruit
News
newsPatrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
News
Robert Fraser, aka Groovy Bob
peopleA new show honours Robert Fraser, one of the era's forgotten players
Life and Style
Torsten Sherwood's Noook is a simple construction toy for creating mini-architecture
tech
Sport
David Silva celebrates with Sergio Aguero after equalising against Chelsea
footballChelsea 1 Manchester City 1
News
i100
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

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    As in 1942, Germany must show restraint over Greece

    As in 1942, Germany must show restraint over Greece

    Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
    Britain's widening poverty gap should be causing outrage at the start of the election campaign

    The short stroll that should be our walk of shame

    Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
    Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

    Homeless Veterans appeal

    The rise of the working poor: when having a job cannot prevent poverty
    Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

    Prince Charles the saviour of the nation?

    A new book highlights concerns about how political he will be when he eventually becomes king
    How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

    How books can defeat Isis

    Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
    Judith Hackitt: The myths of elf 'n' safety

    Judith Hackitt: The myths of elf 'n' safety

    She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
    The open loathing between Barack Obama and Benjamin Netanyahu just got worse

    The open loathing between Obama and Netanyahu just got worse

    The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
    French chefs get 'le huff' as nation slips down global cuisine rankings

    French chefs get 'le huff' as nation slips down global cuisine rankings

    Fury at British best restaurants survey sees French magazine produce a rival list
    Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

    Young carers to make dance debut

    What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
    Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

    Design Council's 70th anniversary

    Four of the most intriguing prototypes from Ones to Watch
    Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

    Dame Harriet Walter interview

    The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
    Art should not be a slave to the ideas driving it

    Art should not be a slave to the ideas driving it

    Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
    Bill Granger recipes: Our chef's winter salads will make you feel energised through February

    Bill Granger's winter salads

    Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
    England vs Wales: Cool head George Ford ready to put out dragon fire

    George Ford: Cool head ready to put out dragon fire

    No 10’s calmness under pressure will be key for England in Cardiff
    Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

    Michael Calvin's Last Word

    Time for Old Firm to put aside bigotry and forge new links