Posted in:

Investment bonds UK: should you invest in UK Government Bonds?

What are investment bonds?

Investment bonds in the UK are medium to long term investment vehicles that aim to give the investor capital growth and long-term returns. Investment bonds are sold as a single premium life assurance policy facilitated by a life insurance form. The investment firm, in this case, invests the money on your behalf until you need to cash the money or die.

What is an investment bond?It is a single premium life assurance policy that serves as a tax-efficient investment
What is the part surrenders – 5% rule?Up to 5% of the annual cumulative premium paid can be taken without any immediate tax charge
Are investment bonds in the UK tax efficient?Yes, taxes are only paid on the gain on chargeable events such as death or bond maturity
Are UK government bonds a good investment?Yes, they are good low-risk investments

Investment bonds are capital intensive because of the minimum investment requirement of £5,000. This amount can be made as one lump sum payment, such as single premium life insurance or regular payments. Investment bonds in the UK can either be whole-life policies or term-life policies.

Investment bonds can enable individuals to plan for tax efficiently as tax-deferred. Investment bonds in the UK can either be offshore or onshore, depending on the residence of the insurance company. There is a likelihood that in the event of death, the insurance company pays more money than the fund’s value since the bond has a bit of life insurance in it.

Investment bonds would be ideal for people planning on their retirement and how to share their wealth among their dependents. The money received from investment bonds in the UK can also go towards long-term care in old age. The lump-sum premium paid out to an insurance company is invested into various assets. The investment firms can allocate the money in stock, shares, and other income-generating funds.

The return on the investment is mainly dependent on the performance of the market, and it can fall as well as rise. An investor is thus likely to lose out on his premiums or interest if the market’s performance is poor. Therefore, investors should ensure that the investment risk associated with investment bonds in the UK aligns with their risk profile. In addition, investment bonds attract various levels of charges which could vary from provider, adviser and fund charges which makes them quite expensive. Investors should assess all options before considering an investment bond in the UK.

Should you invest in government bonds?

You should invest in government bonds in the UK due to their various benefits. Government bonds, also called gilts or UK treasury bonds, are considered risk-free as the investor is assured of repayments at the agreed rate and time. Government bonds are financial or loan instruments that the government gives to individuals to access quick funds to fund projects. Examples of UK government bonds include the UK 10-year gilt and the UK 30-year gilt.

The money lent to the government must be paid within a predetermined period. The initial amount when you invest in government bonds is called a premium, and the interest rate charged is paid to the investor in the form of coupons. This makes government bonds a fixed income asset, which is totally different from premium bonds that offer no interest rates.

There are several ways to invest in government bonds in the UK: Individuals can buy government bonds through UK stockbrokers, government debt management offices, or fund supermarkets. Investors can choose to buy bond ETFs made up of government bonds if they have smaller funds and want exposure and diversification. Bond ETFs are also an option for investors who do not want a maturity date and are unsure of their short vs long financial needs. However, bond ETFs issue monthly interests, unlike UK government bond rates that are issued at regular intervals.

Government bonds, unlike corporate bonds, are not subject to market volatility. Independent valuing companies like Moody’s and S&P rate them as AAA as they are stable with no default rate. The law of risk and return applies to UK government bonds; due to the low risks, the bonds offer meagre returns that average 5-6% per annum. It is worth noting, however, that the government.

Are investment bonds in the UK tax efficient?

Investment bonds in the UK are tax-efficient, and they could be similar to individual savings accounts (ISAs). Investors can withdraw 5% of the amount invested without paying tax, enabling them to save on immediate tax. Investment bonds allow people to invest tax-efficiently because they are treated as non-income investments.

In this case, tax is only paid in a chargeable event. A chargeable event could be death that necessitates the payment of benefits, bond maturity, policy loans, part surrender of the bond or rights under the policy. The chargeable event gains do not apply to the basic rate of tax. People who ought to pay for taxation under such events are considered to have paid tax at the rate of financial gain. Individuals that invest in UK government bonds are therefore required to pay based on their tax position at the time.

Taking withdrawals from the investment bond

Since Investment bonds in the UK are usually medium to long term investments, providers may attach heavy surrender penalties for withdrawals within the first few years. If you are unsure of tying your money down for a lengthy period, you are better off investing in a general investment account or a stocks and shares ISA for its tax-efficient benefits. However, UK investment bonds allow yearly withdrawals. UK Investment bonds apply the part surrender method, allowing the investor to withdraw up to 5% of the original investments every year without paying immediate tax. Money exceeding 5% is subject to income tax and taxed at the prevailing income tax rate.

So, if an individual makes no withdrawals after 20 years, one can withdraw the 100% premium without paying tax. UK Investment bonds income is taxed at the marginal rate. They are tax-deferred, meaning that an investor pays tax only when cashing the cash or after its maturity, which leads to liability. Withdrawals on investment bonds are tax-deferred, meaning that tax is paid when withdrawing the total amount at the policy’s maturity and paid at the prevailing corporate tax rate.

Bond risks

A UK investment bonds bondholder is likely to suffer many risks, including inflation, credit, call risk, default, and interest rate risk. Inflation risks mean that the rate of inflation may reduce or affect the value of the bond in its lifetime. Credit risk means that a bond issuer may default on one or more payments over the bond’s lifetime. Default risk is the likelihood that a bondholder will fail to pay back the finances when due. Call risk measures the probability that a bond issuer will recall the bond earlier when the interest rate falls to save on costs. An interest rate risk is a risk that competition in the secondary market may lead to a reduction in its price.

An investor is likely to face various risks in the bond’s life. For instance, the value of the original investment may depreciate, and an individual may receive less money than they invested. To mitigate against the risks mentioned earlier, investors can look into UK inflation linked bonds and independent agencies such as Moody and Standard & Poor help rate the bonds, giving investors information before investing in a bond.

Onshore investment bonds

Onshore investment bonds in the UK are life insurance policies given by insurance firms based in the UK and are established in the country. The bonds give an investor the liberty to pay a lump sum and other premiums into the available investment funds. In an onshore investment bond, tax is paid on the gains from the income received from the underlying investments of the insurance fund; thus, the individual investor enjoys a tax credit.

Tax on capital gains and income is taxed to the investment companies, not the individual investor. Onshore bonds are offered inside the UK and apply to the UK corporation tax on rental income, gains, and interest but exempt dividends. It pays 20% corporation tax on any income or profits received within the firm. Onshore investment bonds would be ideal for UK residents without relocating plans. The bonds could also work for individuals who have already paid a basic rate tax on any gains.

Offshore investment bonds

Offshore investment bonds are also tax wrappers or portfolio bonds issued by insurance firms outside the UK. Offshore investment bonds are called portfolio bonds because they can hold various assets such as stocks, mutual funds, and shares.

Most offshore investment bonds are held in countries with a favourable tax regime compared to the UK, such as Luxembourg or Guernsey. Investment bonds enable a client to invest in the medium to long-term, i.e., 5-10 years, to maximize capital growth and allow tax-efficient withdrawals. Individuals get tax-deferred withdrawals of up to 5% per annum over 20 years. Any unused allowance is carried over to the following year.

In offshore investment bonds, tax is paid on the capital gains from the underlying assets in the fund. Any income, including dividends, is subject to withholding tax. Income tax is charged at a 20% basic rate, a 40% higher rate and a 45% additional rate. Offshore investments are ideal for non-UK residents. Ideally, the citizens should be non-taxpayers when gains are realized. An offshore investment bond allows for a gross roll-up of revenues and income, meaning that these bonds grow in a tax-free environment. Offshore investment bonds are preferred because they are transparent and tax-efficient since they are not subject to UK taxes.

Are UK bonds a good investment?

There are different types of bonds, but many people prefer investing in government bonds over other bonds due to their stability. Unlike corporate and investment bonds, investors are assured of a fixed interest return within the defined time. However, it is worth noting that UK investment bonds offer an opportunity for diversification.

Government bonds would be ideal, considering the external risk of holding bonds. However, investment bonds would help diversify and give investors a large investment basket of choice. Investment bonds, while tax-efficient, are subject to the regulations of the country under which it is domiciled. Are UK bonds a good investment? Before making any decisions regarding any type of investment, you need to consider your individual circumstances, net worth, potential income streams, investment strategy, and investment opportunities. When deciding whether to invest in UK investment bonds, evaluating the risk, expected return, expected inflation rate, expected life span, and tax bracket is crucial.

Grow Your Wealth with Moneyfarm Share Investing

If you want to add some shares to the bonds in your portfolio, Moneyfarm’s share investing platform is an excellent tool that offers a direct and simple way to interact with the stock market. Accessible via web and mobile, it enables straightforward share transactions. The platform offers diverse UK stocks, ETFs, and mutual funds, catering to different market segments and investment styles.

It also features investments in a globally diversified, professionally managed portfolio, tailored to fit various investment strategies and objectives. Our service, designed for long-term investment success, combines advanced technology with expert advice from our investment consultants, aligning your portfolio with your personal and financial aspirations and providing a detailed overview for sound decision-making.

Moneyfarm’s Share Investing platform supports your investment path, whether you’re investing in well-known companies, delving into different sectors, engaging with ETFs, or expanding your scope with UK Mutual Funds, ensuring a bespoke and insightful investment journey.


What is the minimum requirement for investment bonds?

It depends on the investment bond and product provider. The minimum investment amount can range from £5,000 to £20,000.

What are the tax implications of an Investment Bond?

You can withdraw up to 5% (cumulative) of the original investment every year for up to 20 years on a ‘tax deferred’ basis. Also, income tax charges can occur on ‘chargeable events such as maturity of the investment bond, surrender of bonds, withdrawals above 5%, transfer of ownership for money or money’s worth, and death of the last life assured.

Are UK Investment Bonds income-producing investments

No, UK investment bonds are non-income producing investments, so they have a different tax treatment than other UK investments.

Did you find this content interesting?

You already voted!

*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.