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Investment Bonds With Profits
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A with profits bond is a relatively low risk investment, which is “somewhat” similar to a building society investment, but not easily accessible. Basically your investment attracts bonuses, The annual bonus rate is called the reversionary bonus. On top of this annual bonus you may be entitled to a terminal bonus payable after a certain investment term. Once the annual bonus is added to your plan, it is guaranteed. This guarantee does not apply to any terminal bonus you may become entitled too in future.
Your capital buys units in the with profits fund. Depending on the provider of your choice, you will either receive your bonus in the form of added units (where the unit is often set at £1) or alternatively, the unit price would go up on a regular basis, reflecting the annual bonus rate.
It is important to remember that once the annual bonus is added it is guaranteed, i.e. it cannot be taken away (albeit subject to the MVA – see below). This feature makes this investment product attractive for low risk investors. The bonus rates will not attract any basic rate tax liability under current legislation.
The rates are not guaranteed to stay the same, though neither are rates available from a bank or building society. Over a medium to long term (five or more years) a with profits fund should, under normal circumstances, be able to outperform a building society rate of return. Recent past performance of this type of fund has seen a return on capital in excess of 5% p.a. over a five-year period. However, it should be remembered that product providers could declare a nil or negative annual bonus rate in adverse market circumstances.
The with profits fund is set up for investors to smooth out the expected ups and downs of investment returns. You can therefore not expect the often greater returns from (more) risk bearing unit trusts etc. What you may expect, is a return, which over the medium term, is slightly higher than the bank or building society offers. You will appreciate of course, that past bonus rates are not indicative of future rates. The return on a with profits investment depends on the profits made by the life office and on its policy as to their distribution (whether on early encashment or in adverse market conditions or other circumstances).
THE FOLLOWING IS NOT APPLICABLE IF THE BOND IS TO BE WRITTEN IN TRUST!
Your money is not tied up for any particular length of time. Neither is the investment limited to the age of the investor (in most cases there is however a minimum and maximum “entry” age). The With Profits Bond is ideal for the traditional bank/building society investor to move into a much wider spread of investments with a steady return and a good degree of security.
You may wish to have a monthly withdrawals from your bond (or otherwise a regular income) which can be transferred automatically into your bank account. If you withdraw 5% p.a. over a period of 20 years, the revenue will regard this as return of capital and it will therefore be classed as non-taxable “income”! It does not mean that this income is tax-free. It is simply “tax deferred” and for higher rate tax payers there may be an additional income tax liability on partial or full surrender of the investment bond.
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