An Investment Bond is an HM Revenue & Customs approved investment, set up by investing a lump sum of money and have historically been made available to UK investors via life assurance companies. Whilst it's normally possible to have a regular income paid out to you from an investment bond, the original amount paid in remains invested until you decide to cash it in or die. Often, investment bonds will also include a minimal amount of life assurance so that on death, they pay out a little more than the fund value.

Most Investment bonds are open ended, so they don't have a specific end date. Having said that, in most cases you should be happy to invest your money for at least 5 years. Should you wish to draw out the capital before that time, some providers levy an early encashment charge. This is to help them to recover some of the expenses they will have incurred initially when the bond was set up.

For most investment bonds, because they provide you with the potential to get a higher return than you might get if you were to leave your money invested in a normal savings account, there are some risks associated. However, the risk you take is directly related to the type of investment funds you decide to invest in inside the bond, as opposed to the actual act of investing in an investment bond.

A very important issue to consider therefore is the fund selections you make when investing in an investment bond. Some investment bonds provide a guarantee that you won't get back less than you put in, or they aim to lock in growth on a regular basis. These types of guarantees will generally cost you more in ongoing charges.

Many investment bond providers give investors a huge range of investment funds to choose from with both internal and external fund managers. This gives you a very good choice of where to invest your money and often allows the investor to invest in some of the most successful investment funds in the world. This high level of choice allows you to invest in many different asset classes such as cash, fixed interest funds, property funds and UK and overseas based stocks and shares funds. Whilst funds managed by external fund managers may result in slightly higher ongoing charges, the returns could be significantly higher than those being achieved by cheaper 'in house' managed funds.

Essentially, there is an element of risk to contend with wherever you invest your money regardless of where you invest it Even money invested in a deposit account is subject to the risk that over time inflation will erode the real buying power of the money, especially if interest rates are very low. For this reason, it is impossible to invest without risk but there are ways to reduce your exposure to large risks and high volatility. You should start by investing in a wide range of different types of investment fund and asset classes and remember to not put all of your eggs in to the same basket. This is investment strategy is called Diversification.

At different times in the economic cycle, different investment types react in different ways and whilst some funds are going up in value, its possible that others will be going down in value. This is not unusual and something that savvy investors will take account of. To understand risk and reward fully, you should make this a key point of your discussions with an experienced investment adviser.

Once you have made your initial investment choices, make sure you review regularly to ensure they are performing well and that your investment strategy at outset remains in tune with your own risk attitude and the economic climate in which you are investing. You should expect to have regular reviews with your investment adviser and you should ask them if reviews are part of the service you can expect to receive.

As you would expect, different companies charge different amounts for investing in their investment bonds. The actual charges you end up paying will also depend on how you choose to invest and whether or not you are comfortable to choose your own investment bond from the whole option for you might be.

What about advice costs?

If you decide to get some advice, first, make sure you speak to an independent financial adviser. You will also need to have an open and frank conversation with your adviser about how you would prefer him or her to be paid for the advice you are being given. Please remember that commission based advice is NOT free advice, it just means that the commission being paid to your adviser is already built in to the charging structure of the product you are investing in. In many cases, fee based advice can provide better value because if you choose to deal with an adviser on a fee basis, any commission that would have otherwise been payable to the adviser is used to enhance the terms of the investment you are making.

Charging structures on investment bonds

The most common types of charging structures seen on investment bonds include:

• An initial charge - you pay an initial charge when you invest your money. This has the effect of reducing the amount available from day one, however, it is also very transparent and as such is the preferred method chosen by many professional investors.
• An establishment charge - you don't pay an initial charge, instead the provider levy's a higher annual charge for the first 3 to 5 years of the investment. This has the effect of spreading the charges out over the first few years you invest. Bearing in mind you hope that your investment will go up in value, it also means that the amount you pay overall could be far higher than it would have been had you chosen the initial charge option instead.
• Tiered allocation rates - Alongside an initial or establishment charge, an allocation rate has the effect of reducing or increasing the amount of money used to buy units in the investment funds you choose to invest in.
  
  (As an example, an allocation rate of 98% means that for every �100 you invest, only �98 actually gets invested. Therefore it is, in effect, a 2% initial charge. If you are offered an allocation rate of more than 100%, do not be misled in to thinking that this means that you are making money on day one. There is likely to be an initial or establishment charge that will offset this higher allocation rate.)
• Annual management charges - every year your fund manger and adviser have costs to meet themselves and these are normally met at source via an annual management charge. This is used to cover the cost of ongoing expenses such as the costs of fund management and administration.
• Exit charges - when you decide to take out some or all of your money, you may incur a charge. This is most likely in the in the first 5 to 6 years but if you were to invest in to a 'with profits bond' this could happen at any time other than on pre determined dates.

How tax is paid on an investment bond is dependent on whether the bond is an 'onshore bond' or 'offshore bond'.

"Onshore" Bonds

On UK based "onshore" bonds offered by life assurance companies, the equivalent of basic rate tax is paid within the fund and this is non reclaimable by lower or basic rate taxpayers. Therefore, if you decide to use an �onshore� bond, it will mean that all of the money invested in this style of contract will effectively be taxed at basic rate tax, which is deducted at source within the fund. If your taxable income is so low that you are a non tax payer, by investing in an 'onshore' bond, you may end up paying more tax than you would otherwise pay if you were to invest in another type of investment as you might not be taking full advantage of your personal allowance because any tax paid within an 'onshore bond' cannot be reclaimed the investor.

"Offshore" Bonds

When looking at bond investments, an alternative to consider would be an "offshore" investment bond. The reason for this is because offshore bonds are not currently liable to any form of tax in respect of the income and gains on policyholders� funds until the investment is actually encashed or income above 5% (of the original amount invested) per annum is received.

This means that, with the exception of certain investment income that may be subject to a tax deduction in its country of origin, 'offshore bonds' grow tax-free. Just like onshore bonds, offshore bonds, when withdrawals are made, have a useful tax advantage of allowing up to 5% of the original investment to be withdrawn each year, for up to 20 years, without giving rise to a UK tax liability.

If you do decide to invest in an offshore bond, you are responsible to declare to the Inland Revenue any withdrawals made from that are over and above the 5% (of the original amount invested), per annum allowance if you are liable to UK tax. This allowance can be carried forward if you do not use it each tax year. (Under current legislation, which of course is subject to change.)

Summary of tax position -

• If you are a non-taxpayer - you will not need to pay any further Income Tax but neither can you reclaim any tax paid at source
• If you are a basic-rate taxpayer - you will not normally need to pay any further Income Tax
• If you are a higher-rate taxpayer (or close to being a higher rate tax payer) - if you take out more than the 5% (of the original amount invested) in one tax year, you have to pay more Income Tax.

Dependent on your own circumstances, the amount of tax you might have to pay on if using an investment bond could be higher than it would be if you were to invest in alternative investments like a unit trust.

However, there might also be some very good reasons to use an investment bond instead of an alternative like the ability for the investor to invest whilst a higher rate tax payer in the expectation that in the future he or she will be a lower rate tax payer. In addition to this, investment bonds can be very tax efficient investments for trust funds or as part of your inheritance tax planning strategy.

Subject to any early exit charges that may apply, you can normally get some or all of your money out of an investment whenever you need it.

At the very least, you can normally take out up to 5% of the original amount you invested without any immediate Income Tax liability.

Investment bond providers are often happy to pay out regular withdrawals, (monthly, quarterly, half yearly or annually) of up to 7.5% without charging an exit penalty. Under the tax rules you can take up to 5% each year to provide you with a regular income with no immediate Income Tax liability for up to 20 years.

You should first read all of the above important information. Once you have a reasonable understanding of the main points, you should make sure that you fully understand the details of the specific bond that you are considering investing in. you should read the Key Features of the bond and pay close attention to charging structure being proposed.

If the bond you are investing in has a lot of investment funds to choose from, you should seek advice from an independent financial adviser who can help you to understand them and can also help you to put an investment strategy together that is appropriate to your needs.

You can call us and ask us to help you with this most important of tasks.

Here are some salient points that will help you to decide if an investment bond is right for you -

• Tax - dependent on your circumstances, alternative investments like unit trusts and/or investment ISA's could result in a much lower tax liability so you should ensure you have a conversation about the tax implications of different investments in your own circumstances before you make a final decision.
• Advice Costs - You should have an open and frank conversation about advice costs with your adviser. Investment bonds can pay higher commission amounts to advisers than some other investments so it is always a good idea to find out how much commission your adviser may get and then to ask them how much they would get if they were to recommend a different type of plan (like a unit trust). You should also ask if the amount being paid now will cover regular reviews on your investment bond and if not, how much you might be expected to pay for reviews in the future.
• Charges - ensure that you understand the charges that you will have to pay each year and look for evidence that the funds you are investing in have performed well within their own sector.
• Early exit and surrender charges - some investment bonds have exit charges in the early years, and some do not. Make sure you know about any charges like this and do not commit money that you know you are going to need to withdraw in the short term.
• Initial charges - don't get misled in to thinking that paying a charge up front means that the investment plan you are considering isn't good value for money. In many cases, investments that have an initial charge have much lower ongoing charges and as such that can make much better value for money over the long term.
• Inflation - should never be under estimated - it is a real risk because if your money does not make at least inflation, it means that the buying power of your investment is going down. You'll need to make investments that have the potential to meet the annual costs of investing and have a reasonable chance of beating inflation.
• Risk - make sure you are happy with the level of risk you are willing to accept on your invested money and that you can afford a loss in value.

If you've got an investment bond already, you should review it often to make sure that the funds you are invested in are doing ok. You should review the last statement you received and take it to an independent financial adviser that specialises in investment planning.

You can take advantage of our free consultation service and ask us to go through your investments with you and highlight any areas that we agree need further investigation as needed.

If you are not being offered regular reviews of your investments, you should consider choosing a new independent adviser that is able to provide you with a regular review and find out if a review will cost you.

You should use a review like this to ensure that check whether the investment fund choices remain appropriate for your risk attitude and suitable for your objectives. It's also possible that your risk attitude may have changed since you first invested money in the bond or you may find that some investment funds have been or are expected to perform much better in the future which could lead to you deciding to reassess your investment fund strategy or change the asset classes you are currently invested in to take advantage of the current economic situation.

It is often possible to switch funds inside an investment bond for free which can be really helpful to safeguard you money in times of high volatility and then to re-invest the money at a later stage when an opportunity prevents its self or your confidence ha returned.

If you are thinking about surrendering an existing investment bond, make sure you know about all of your options first and that you have fully considered the tax implications of such an action.

Lots of investment bonds have high early years exit charges and it may not be in your best interest to encash the bond at certain times.

To try to encourage you to stick with them, some bonds even pay special loyalty bonuses after a certain amount of time (e.g. 10 years).

You may also have an annual allowance to enable you to take out without the provider making a charge that you will need to be aware of. On some occasions, it may be better to settle for a little less now and then to leave the remainder of the money invested over the next few months whilst waiting for a new tax year or policy year to start before taking out any more.

If you are thinking of surrendering your bond to invest in a different investment plan, or you've been advised to do that, you should make sure that you are completely comfortable that you know the reasons why you are doing that and that it is in your best interests. Sometimes, it would be a better option to switch funds within your existing bond as opposed to setting up a new investment with new start-up charges.

Whilst not always the case, moving investments wholesale from one place to another could mean that you are paying quite significant charges each time you swap from one provider to another.

Because charges on a new investment can be expensive in the early years, even if your bond has not performed very well and you have lost money, the best option may still be to leave it where it is. To establish this, you should ask an independent financial adviser to review the bond for you on a 'fee basis' and to take this specific point in to account to ensure that you get an objective recommendation.

The key to making the right decision here is to establish what it is your giving up by moving it and what you will be potentially gaining so that you can make a decision about what you are getting that will be better by moving and help to offset any loss because of new charges or fees.

If you would like to look further into investing into an investment bond, you can contact us at info@money-minder.com or call us on 0800 197 8888 between 9-5, monday to friday or call 0845 218 9194 out of office hours when we will be happy to discuss your requirements further.

We are able to offer a full independent financial advice service and recommend appropriate solutions to your needs that will take account of your personal financial circumstances.

If you would like to look further into reviewing an investment bond, you can contact us at info@money-minder.com or call us on 0800 197 8888 between 9-5, monday to friday or call 0845 218 9194 out of office hours when we will be happy to discuss your requirements further.

We are able to offer a full independent financial advice service and recommend appropriate solutions to your needs that will take account of your personal financial circumstances.