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With-Profits bonds continue to offer a cautious approach
to investment
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Much will depend on your attitude
towards risk-for-reward, but if you have a capital sum
to invest - typically £5,000 or above - and you are
seeking a more cautious approach to long-term investment,
then a with-profits bond is worth considering.
Cautious approach
A with-profits bond is a single premium investment,
usually for a minimum of £5,000, which is invested in
the with-profits fund of a life assurance company. With-profits
funds invest in a mixture of equities, gilts, corporate
bonds, cash and commercial bonds, with typically half
to three-quarters of the portfolio invested in the stock
market. For the more cautious investor they offer a
lower risk approach and seek to provide good long-term
investment returns.
Annual bonuses
A with-profits policy allows you to participate in the
profits of a life assurance company, which are distributed
in the form of bonuses. Each year a 'reversionary' bonus
is paid and added to the policy, and this cannot be
taken away from you. At the end of the policy, you could
also receive a larger 'terminal' bonus, based on the
investment performance over the life of the policy.
No bonus is guaranteed and investors trying to exit
a fund in times of poor performance may be subject to
an exit penalty, the so-called market value adjuster
or MVA. This is intended to protect other investors
in their with-profits funds by ensuring that departing
investors do not get more than the fair value of their
investment.
Tax deferred
With-profit bonds are treated quite differently for
tax purposes to other investments, in that anyone can
withdraw 5% a year of their initial investment. This
is free of all tax to the investor for a period of 20
years, but some tax may be payable if you are still
a higher-rate taxpayer when final encashment takes place.
No capital gains tax (CGT) is paid, as insurance companies
pay CGT on gains their investment fund makes.
Top-slicing
The Revenue gives another concession called 'top-slicing
relief'. This means that the rate of tax that you pay
on the whole gain is calculated by dividing the total
profits you make from the bond by the number of whole
years that you have had the policy in force. This top-sliced
gain is then treated as the most highly taxed part of
your income to determine how much as a proportion is
subject to higher-rate tax, if any.
If you would like to find out more about how a with-profits
bond could fit into your portfolio, please
e-mail or
contact us for further information. |
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With-profits
bonds can be ideal for cautious investors
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The past
is not necessarily a guide to future performance.
Levels and bases of, and reliefs from, taxation
are subject to change. These investments are
intended as long-term investments. If you withdraw
from these investments in the early years, you
may not get back the full amount invested. Bonuses
are not guaranteed and can vary. There may be
a market value adjustor applied on encashment,
which could have the effect of reducing the
value.
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