With Profit Bonds
A with-profit bond is a long-term (10-20) years investment that you buy with a lump sum, although some bonds may allow more money to be paid in at regular intervals.
It is most often used to pay you a regular income from your savings.
With – profits bonds are generally a medium risk investment it is important to understand that they do carry investment risk and your original lump sum investment is not guaranteed.
How do they work?
The insurance company puts your lump sum (after a deduction for expenses) into a pooled fund with the intention of making it grow over time. This pooled fund is invested and managed by the insurance company in a variety of ways. This usually involves a mix of shares on the stockmarket, gilts, corporate bonds etc.
What can you expect in return?
Each year the insurance company will value the fund and will normally add a bonus. They do not guaranteed to add a bonus but once it has been added, it can’t be taken away.
A final or terminal bonus can also be added at the end of the bond’s term.
Cashing in your bond.
With-profit bonds are intended to be medium to long term investments. If you decide to cash them in early (particularly in the first 5 years) you might get back less than you paid. This is because the insurance company may charge you for some of the costs it incurred in setting up your policy.
On some with-profit bonds, if you cash in the bond the company may apply another type of exit penalty called a Market Value Reduction (MVR). The MVR can also be called a Market Value Adjustment (MLA). This will reduce the surrender value of your bond to reflect poor investment performance. The purpose of the MVR is to ensure that your surrender value is not unfairly higher than the market value of the bonds’ assets and that a fair share is left for the remaining bondholders.
Some bonds specify certain periods where they will definitely not apply an MVR. If your bond does this, it will often be on the 10th anniversary of taking out the bond. MVRs are applied from time to time but you should check before surrendering.
What are the tax implications?
Can be written in trust for maximum Inheritance Tax efficiency.
If you cash in all or part of your bond you may make a gain, which could be liable to income tax.
The tax implications can be complicated if you are a higher rate tax payer or are eligible for age-related personal allowances so we would always recommend that you seek further professional advice.