The bond that time forgot

Investors who want reassurance as well as returns on their cash might take a look at distribution and guaranteed income products

In the early 1990s distribution bonds were a popular investment.

The insurance firm Sun Life, in particular, was raking in the cash with its own pounds 3bn bond fund, and other life insurance companies were rushing to launch their own me-too products. Since then, however, distribution bonds have largely disappeared from view.

Inevitably part of that earlier popularity was simply because they were heavily pushed by the life insurers, and because more tax-efficient personal equity plans (PEPs) had not reached their current popularity.

But part of the explanation was also that, as relatively conservative stock market-based investments, they appealed during a period when memories of the 1987 stock market crash were still fresh in investors' minds and the stock market remained volatile.

Keith Middleton, a marketing manager at Sun Life, explains: "The original concept was to mirror a building society type investment, trying to protect the capital, but paying out an income as well.

"The basic idea of distribution bonds is that, as far as possible, capital value should be maintained."

Distribution bonds pay an income, normally half-yearly, which is net of basic-rate tax. Higher-rate taxpayers can postpone their additional tax liability for up to 20 years, so long as this income and any other withdrawals are less than 5 per cent a year. This can be useful for people who plan to drop tax bands, say when they retire, because that way the tax slate is wiped clean. Even with this potential attraction, however, distribution bonds are significantly less tax-efficient than PEPs, where all profits are tax-free.

A distribution bond will put your money into a mixture of investments such as shares and gilts. The mixture of holdings in each company's bond may be very different, and it is this mixture that will determine the bond's performance. Sun Life says pounds 10,000 invested in its distribution bond on 1 December 1990 would have grown to pounds 17,174 five years later. The comparative figure for a higher-rate building society account is pounds 12,448.

It was the Sun Life bond's heavy weighting towards gilts which appealed to safety-conscious investors in the turbulent early 1990s.

"Now the stock market's doing well, of course, it's worked against Sun Life," says Stephen Ingledew of Frizzell Life & Financial Planning, a firm of independent advisers. "But there are distribution bonds on the market that have a higher holding in shares.

"On the other hand, there are companies like Allied Dunbar that have had a higher proportion in property, and property has not been a good investment in recent years."

The lesson is to be very clear just what investment mix each distribution bond adopts before deciding between them.

In the case of Sun Life's bond, both the biggest and the longest-running on the market, the minimum investment is pounds 5,000, rising to pounds 12,000 if monthly income withdrawals are required.

The bond carries an initial charge of 5 per cent and an annual management charge of 1 per cent. It is worth remembering that there is an exit charge of up to 5 per cent if you cash in the bond within five years.

Suggested Topics
Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
voicesIs a huge gamble on oil keeping the First Minister up at night?
Life and Style
tech

Apple has been hit by complaints about the 1.1GB download

Arts and Entertainment
Pointless host Alexander Armstrong will voice Danger Mouse on CBBC
tv

Much-loved cartoon character returns - without Sir David Jason

Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

PROMOTED VIDEO
Arts and Entertainment
Actor and director Zach Braff
tv

News
i100
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Arts and Entertainment
tv

News
i100
Arts and Entertainment
The former Doctor Who actor is to play a vicar is search of a wife
film

Matt Smith is set to join cast of the Jane Austen classic - with a twist

News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Lionel Messi in action for Barcelona
filmWhat makes the little man tick?
Arts and Entertainment
Meera Syal was a member of the team that created Goodness Gracious Me
tv

Actress to appear in second series of the hugely popular crime drama

Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
Life and Style
i100

Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
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

Property Underwriter

£70-90,000: Saxton Leigh: Our client a London Market Insurer are seeking a Pro...

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week