What Are Investment Bonds?

If you’re considering putting your hard earned cash into investment bonds, we’ll help you know exactly what these products are, and what you’re getting yourself into…

Investment bonds are products that offer the potential of gaining medium to long-term returns on your money. It is essentially loaning a sum of money to a company or a government. Interest is usually paid in the form of a coupon to investors.

Investment bonds explained

Where can I buy an investment bond?

Your cash will be invested into the specific bond that you’ve chosen in the hope that the capital on your funds grows, and once the term of your investment bond has come to an end, you can then withdraw your money and the fund will close.

Different types of bonds can be purchased in many places.

  • An investment platform may enable buying and trading of different types of bond, including corporate and gilts.
  • Directly with a company.
  • A tradable stock exchange, as explained below.

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Corporate Bond Funds

If you are investing in a stocks and shares ISA, you’re able to choose from a variety of funds – each of which is looked after by an investment manager. Many corporate bonds and gilts are only available to institutional investors of this nature.

However, unlike a standard savings account that may offer you a guaranteed amount of interest at the end of your savings term, the amount you make on your investment bonds all depends on how well they perform in the market. Even the amount you invest in an investment bond isn’t guaranteed – so you may get back less than what you initially invested.

If you do use an ISA for this purpose, you’ll not pay tax on the interest due to the tax efficient wrapper. However, all ISAs have a limit of £20,000 per year which can be added.

Insurance Bonds (Life Assurance Bond)

First of all, what exactly are insurance bonds? Quite simply, they can form part of life insurance cover that also allow you to invest an amount of money – usually no less than £5,000 – for either a fixed period of time (a typical bond of this type will lock your money away for at least five years) or sometimes for no set term, ending at death.

When the time comes to cash your investment bonds in, the amount you get back all depends on how well your particular investment bond has performed.

That said, these investment bonds are only an option for you if you understand that there is an element of risk: you could make money, but equally, you could lose money. To ensure you make the right decision based on your own specific circumstances, it’s always advisable to seek the advice of a financial tax adviser or accountant.

At the end of your investment bond term, you will receive a lump sum. How much you receive all depends on your bond’s terms and conditions and also how well (or poorly) your bond has faired. Some bonds can be kept open as long as you want and can form part of an estate.

If you want to ensure you choose an investment bond with minimal risk, then you can opt for one that will guarantee the capital that you invest, or indeed, how much it will return to you on completion of the term.

These bonds are only usually ideal if you have a lump sum of money that you are happy to lock away for a certain amount of time. However, that said, it is usually possible to withdraw part of your investment (or all of it, if needs be), but if you want to access it within the first few years of your investment, you will often incur a surrender penalty. You will also possibly be hit with a tax charge too.

Gilt Bonds

Bonds offered by the UK government are known as ‘gilts’ or ‘gilt-edged‘. Essentially, the government is borrowing money by issuing bonds of this nature, and they are considered of a high credit quality, as the government has never defaulted.

Funds and institutional investors trade these highly liquid bonds in high numbers, and a way to invest in them would be through a managed fund which deals in bonds of this nature through a stocks and shares ISA or self invested pension plan.

Retail Bonds

Retail bonds were designed to address the lack of opportunity for smaller investors to enter the corporate bond market. These bonds are tradable on the London Stock Exchanges ORB system. Using this system new and existing businesses tap into capital provided by large numbers of smaller investors with a series of bonds that they issue.

These traded bonds can be lower risk than the shares as being creditors of the company in the event of bankruptcy they would take priority.

Retail bonds fill the gap as they typically require a minimum investment of between £100 and £5,000, so are within reach of individual investors. The market however, is still relatively young and not too many new bonds are issued by companies on a regular basis.

Although some of the brands will be well known to retail investors, so risk can be judged, it will be harder to assess the risk of less known companies. Another option would be to again trust the experts, and put your faith in a bond fund.

The fund manager will diversify across different bonds, lessening risk, and also do the hard work of selecting which bonds are best suited for that particular funds goal. Of course, funds will still be at risk as with any investment of this nature.

Onshore and Offshore Bonds

You may have read about both onshore and offshore investment bonds. The difference between them mainly is how tax affects them.

Offshore bonds are investments held outside of the UK in tax havens such as the Channel Islands or the Isle of Man for instance. Choosing to invest in an offshore bond means you’ll be charged either no tax – or not much at all. However, there is likely to be a greater risk associated with your investment bond.

Onshore bonds are held in the UK and are obviously subject to the tax rules and regulations of our country and will be where most people invest.

What other types of bond are there?

  • Premium Bonds
    Enable savers to enter a prize draw with tax free winnings.
  • Mini Bonds
    Often a way for smaller companies to raise funds, without losing equity in the business.

If you want to know the right time to invest in premium bonds, read this article.

What about tax?

Fortunately, even once you’ve invested your sum into your investment bond which is not in an ISA, you may still able to earn interest each year and not pay tax – if it is within your personal tax allowance, anyway .

But, if you go over your PSA,  any returns will be hit by income tax, so it’s worth bearing that in mind.

When you decide to lock your money away into an investment bond, it’s worth understanding that in most cases your gains and income made from your bond will be taxed at 20%. This tax charge will be paid straight out of your bond.

If you need to withdraw an amount from your bond then you may be able to make withdrawals each year up and not incur any extra tax charges.

Each investment bond product comes with its own set of rules, so to make sure you appreciate exactly what sort of charges you could incur if you need to access your savings, make sure you look closely at the conditions of the policy – or enlist the help of an independent financial advisor to look through things thoroughly with you.

How much can I invest?

How much do you have? Some investment bonds require you to invest a minimum amount – £10,000 is the norm, but you may be able to find savings bonds available for as low as £500.

Bonds can also have a maximum amount an individual is able to invest, but it is possible to spread investments across different securities.


To ensure you appreciate whether an investment bond product is the right option for you, it’s advisable to discuss things further with an independent financial advisor, or accountant.

What if an investment bond isn’t the right choice for you? There are plenty of other savings options available. For instance, you may want to look at shares, investment trusts, unit trusts, tracker funds, or stocks and shares ISAs.

As with investment bonds, they each come with their own set of conditions, but they may be a better fit for you if you don’t want to lock your savings away for a whole-of-life term, or you’d prefer to place your money somewhere with less associated risk.

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Courtney Lucas
Last updated: July 20th, 2018
London Capital & Finance - 5 Year Fixed ISA
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