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
Sunday 02 June 1996
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.
- 1 To help fuel their propaganda machine against the poor, our government has now decided to redefine the word 'welfare'
- 2 Anti-gay hate preacher accidentally tweets 4,000 followers cartoon clip of him 'confessing' to be a 'homosexual sodomite'
- 3 Woman opens professional cuddling shop – gets 10,000 customers in first week
- 4 Grayson Perry: London needs affordable housing because 'rich people don't create culture'
- 5 Kenya bus attack: Al-Shabaab militants kill 28 non-Muslims who failed to recite Koran
Ryan Gosling granted temporary restraining order against a woman 'convinced she was his twin flame'
Jennifer Lawrence sings in new The Hunger Games: Mockingjay Pt 1 clip on YouTube
Anti-gay hate preacher accidentally tweets 4,000 followers cartoon clip of him 'confessing' to be a 'homosexual sodomite'
Woman opens professional cuddling shop – gets 10,000 customers in first week
Grayson Perry: London needs affordable housing because 'rich people don't create culture'
Rochester by-election: Ukip gains second MP as Tory defector Mark Reckless holds seat
'Beast of Bolsover' Dennis Skinner takes Ukip MP Mark Reckless to task moments after he is sworn in
Rochester by-election: Labour MP Emily Thornberry resigns after posting white van and England flags tweet
France 'blocks' Russian sailors from boarding a warship
Revealed: How the world gets rich – from privatising British public services
Myleene Klass: Ed Miliband 'strikes back' by comparing UK's need for Labour's mansion tax to Hear'Say track
iJobs Money & Business
Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...
Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...
£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...