Bonds keep us interested

For a rock-solid bond that pays fixed interest with guaranteed returns, buy gilts

THE WORD bond applies to a wide range of investments, and although they lack the glamour of Ian Fleming's fictional 007, they should make up for it in reliability, writes Harvey Jones.

Traditionally a bond is a fixed-interest security issued by a company or government. In practice the word applies to a range of products where you pay a lump sum and in return receive interest (sometimes for a fixed period) plus your capital back at the end.

Most common are with-profits bonds issued by life firms, which appeal to the cautious investor. They aim to provide a steady return through investment in a wide range of shares, gilts and property.

Essentially they are whole-of-life insurance policies, but with an investment element. They pay an annual bonus plus a further bonus at the end of the term, called the terminal bonus. Annual bonuses are typically 6-7 per cent before tax.

You retain the annual bonus whatever happens, but the terminal bonus depends on the performance of the fund. This is the greatest element of uncertainty, although the aim of the fund is to smooth out short- term market fluctuations.

With-profits bonds have several advantages, says independent adviser Brian Dennehy. The insurer issuing it pays the basic rate of tax direct from the fund, and top-rate taxpayers only pay the difference at the end of the term.

If the policyholder has retired or fallen into a lower tax bracket when the policy matures, they will not pay the extra tax. Furthermore, 5 per cent of this investment can be withdrawn tax-free each year.

There are other questions to consider, however. First, your money will be locked in for five years. Second, you should examine the financial strength of the insurance company.

Insurance companies also offer distribution bonds that pay investors a regular income without eating into the original investment. With most distribution bonds, income earned can be reinvested and, depending on the performance of its assets, the capital grows.

Distribution bonds are marginally more risky as your income is stock market dependent, and therefore does not benefit from the smoothing effect that keeps with-profits bonds steady.

David Turner of Scottish Provident says investment bonds offer a wider range of options than unit trusts or investment trusts; they provide a choice of guaranteed or protected funds that may appeal in a volatile market, and it is usually cheaper to switch between funds than unit trusts.

A word of warning. If you have a financial adviser who recommends you take out an insurance company bond, ask what commission he will earn before making a decision.

Two different types of bonds that are easily muddled are guaranteed income bonds and stock market linked bonds. The former provide a guaranteed return over a fixed period, usually five years, which you can take as income or a lump sum when the term ends. Your original investment is also returned. The advantage is security, but at the cost of lower returns, at 5 per cent or less.

Stock market linked bonds, often called high-income bonds, typically offer a guaranteed income of around 9-10 per cent a year over five years, but your capital is not guaranteed. If the stock market performs badly over the term, your income could end up being paid out of your capital.

If you want a rock-solid bond paying fixed interest with a guaranteed capital return then buy gilts. With inflation low you should see a healthy return. Gilts are sold by the Bank of England (0800 818614) and interest on gilts is taxable.

Corporate bonds are similar to gilts, but being issued by companies means there is an element of risk.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Supporting role: at the Supreme Court, Rhodes was accompanied by a famous friend, the actor Benedict Cumberbatch
booksPianist James Rhodes on the extraordinary legal battle to stop the injunction of his memoirs
Arts and Entertainment
Jesuthasan Antonythasan as Dheepan
filmDheepan, film review
Sport
Steven Gerrard scores for Liverpool
sport
News
Tattoo enthusiast Cammy Stewart poses for a portrait during the Great British Tattoo Show
In picturesThe Great British Tattoo Show
News
ebookA unique anthology of reporting and analysis of a crucial period of history
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.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?