Investment bonds What are investment bonds?

Investment bonds contract

Investment bonds are life insurance policies

Investment bonds are life insurance policies in which you can invest a lump sum, which goes into a variety of funds. They’re not the same as corporate bonds, premium bonds or fixed-rate bonds. In fact, strictly speaking, investment bonds are not really bonds at all – they are effectively a type of investment fund.

You have a choice of two types of funds within investment bonds – with-profits or unit-linked. Both have the same tax rules: tax is paid on both growth and income accrued in the fund by the insurer.

Are you ready to invest?

The important thing is to choose the savings or investments that suit your goals and time of life and what you need to consider stays the same whether we're living in times of boom or bust. Only think about investing in the stock market if you can say yes to all these questions:

  • Are you free of debt (other than your mortgage)? Debt is expensive and is likely to cost more than you could earn by investing.
  • If you have dependents, do you have enough life insurance?
  • Have you protected your income in case you become ill or injured?
  • Have you built up an emergency fund? You need three to six months’ salary in an accessible savings account such as an easy–access cash Isa.
  • Do you have a lump sum or surplus cash to invest each month?

What am I saving for?

Brainstorm your goals and group them as short, medium or long-term. Prioritise saving for your retirement through a pension.

Short-term goals (less than five years)

Stick to cash savings. A Best Rate cash Isa is perfect. Don’t invest – if your investment falls you might not have time to recover your losses before you need the money.

Medium (five to ten years) and long-term goals (10 years or more)

Investing is an option for medium-and long-term goals. The alternative is to put your money in a savings account where it will be safe (providing you make sure it’s within the limits covered by the Financial Services Compensation Scheme).

However, the lower the risk you take with your money, the lower the return you can expect. And the danger is that over time your savings could be eroded by inflation especially if the interest is taxed, and your money doesn’t grow fast enough to meet your goals.

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Which? works for you