Using bonds for growth

2 min read

Using bonds for growth

Using bonds for growth
With insurance company growth bonds, investors pay the insurance company a lump sum and after a fixed period typically get their capital back plus an agreed amount. With growth bonds, interest accumulates over the term of the bond and is paid out at the end. Some bonds pay out a guaranteed amount – ideal for investors who don’t want to risk their capital. Your return in others depends on the performance of the stock market.

TIP: Insurance company bonds are paid after tax is deducted and it cannot be claimed back. They are therefore unsuitable for non-taxpayers.

Guaranteed equity bonds, also known as guaranteed stock market bonds, provide a guaranteed return linked to the performance of the stock market. For example, you may be guaranteed the return of your capital in full after five years plus a percentage of any growth in the FTSE 100 index over the period. If the Footsie falls during this time, investors still get back their original investment. The price of this safety net is that the bonds may only pay up to a certain percentage of any growth in the stock market, so you do not benefit from the full increase in the stock market.

Unit-linked bonds invest a lump sum and your money buys units in an insurance company fund of your choosing. The return on your investment depends on the performance of the fund.

If you are a low-risk investor, consider with-profits bonds. They offer a half-way house between the thrills and spills of equities and the security of deposits. With-profits bonds allow you to invest a lump sum in the with-profits fund of an insurance company. The fund invests in a range of assets including shares, gilts and property. Your investment shares in the profits made. So each year, you are credited with a reversionary or annual bonus determined by the insurer and to a large extent it reflects the investment success of the fund. Critically once the bonus has been allocated it cannot be taken away. You get a further bonus when the bond ends – called the terminal bonus.

The annual bonus helps smooth out the ups and downs of the stock market because if the fund performs badly in later years, bond holders still have their bonuses which cannot be taken away. And, in theory, the bond company should hold back some growth from the good years so they can boost payments when times are harder.

TIP: Use bonds as part of your tax planning. There is no basic rate tax or capital gains tax to pay on proceeds from them.

 

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