An additional plus of these bonds, provided by life insurance companies, is that they pay income net of tax at the basic rate. In doing so, they often offer higher net returns than building society bonds, whose rates are gross of tax.
The "guarantee" offered by these bonds, which are single-premium life policies, is that of full repayment of capital by the life company provider.
Michael Green, who helps design these products for Abbey Life, says: "We are subject to strict regulations from the Department of Trade and Industry which means we have to be able to meet all our future liabilities before we can use any surplus money.
"People who take out guaranteed income bonds are also protected by the Policyholder Protection Act. This will return 90 per cent of the value of any policy in the event of the life office going broke."
Investors are also protected by the risk-averse components of guaranteed income bonds, which are made up of government loan stock or gilts. The chances of the British government going bankrupt or defaulting on a repayment are rated at almost nil. But because many of these bonds lock in investors for up to six years on a fixed rate of return, potential buyers should be careful. They may achieve higher rates now but variable building society rates could appear far more attractive several years down the line if interest rates rise, as many experts predict.
Colin Jackson, of financial advisers Baronworth Investment Services in Ilford, Essex, believes that with the next move in interest rates likely to be upwards, investors should beware of locking into a long-term bond.
Mr Jackson says: "At the moment I would not recommend anyone going into a bond with a life of more than two years; the rates being offered by a five-year product are too low at present."
Jamie Ware, director of financial advisers Churchill Investments, says: "These are ideal for older people who no longer want stock market risk and need an income to pay things such as the gas bill. But timing is important. There is no point in buying one at the bottom of an interest cycle, as at present."
As for the tax element, Mr Jackson says: "If you are a basic- rate taxpayer you get your income from guaranteed income bonds with no additional tax charge, but if you are a non-taxpayer you cannot reclaim any tax."
By comparison, a saver who invests the same amount with a building society and who is not a taxpayer can receive income from a society bond without any tax charge. Because in certain cases building society rates are better, investors can do much better.Reuse content