Using bonds for income
With insurance company income bonds, insurance companies offer a range of income bonds. You pay the insurance company a lump sum and in return receive a regular fixed income – either monthly or annually – over a pre-determined period, often five years.
Guaranteed income bonds are by far the most popular bonds issued by insurers. They pay out a set level of income for a fixed number of years, usually five. They aren’t linked to the stock market so there is no risk to capital, making them ideal for income seekers who don’t want to risk their cash.
They can look attractive when interest rates are falling but you won’t be able to get at your capital until the end of the term, and it can be unwise to lock yourself in if you think interest rates in general will rise in the future. They aren’t for cautious investors – if the stock market fails to perform to a specified level, your capital will be seriously eroded.
Distribution bonds are aimed at investors who need a regular income from their savings. The annual income is dependent on the performance of the distribution fund which invests in shares and gilts. They also offer the potential for capital growth.
Bonds issued by the British Government are called Gilts, though they are also known as gilt-edged securities or British Government stock. They are probably the safest kind of bonds you will get as there is little chance of the Government going bust. They pay a fixed income each year. Many also have a redemption date – 2009 for instance – when the Government will repay their value. However, you don’t have to keep them until redemption and the bonds are traded regularly (see INVESTMENT – Bonds).
Corporate bonds are issued by companies and so can be more risky than Gilts. But for this reason they usually pay out a higher return. Interest paid on bonds is taxable but you can avoid this by using a corporate bond Isa. You will have to use a stockbroker to buy corporate bonds – there will be a charge. This depends on which broker you use, the size of the deal and the bonds traded. (see INVESTMENT – Bonds)