Buying guaranteed income bonds is somewhat like placing your money into a fixed rate savings account. Your bonds will pay out a set level of interest over a pre agreed period, normally between one and five years, providing you with a guaranteed income.
You can receive this income weekly, monthly or, more commonly, annually. In addition you can withdraw up to 5% of your investment each year. Other than that, unless you are willing to face heavy charges for early withdrawal, you’re expected to leave your sum to mature, and cannot access the rest of the funds until then.
Typically the minimum amount you can place in such bonds is £5,000 with the maximum normally being £1,000,000.
Perhaps the biggest difference with between guaranteed income bonds and savings accounts is the fact that they are purchased from insurance firms rather than banks. However, potential investors should rest assured that these institutions offer the same high level of security you’d expect when placing your money into a regular account. Indeed, the only way your original pot of capital can be eaten into or lost is in the unlikely event of your chosen insurer going bust. Even then you can claim compensation worth up to 90% of your investment.
The other big difference, the one that attracts many high earning savers, is that, due to UK tax laws, savings can be made on the amount of your earnings that will be payable to the inland revenue. This is because all investment bonds are charged at the basic rate of tax (20%). As higher and top level tax payers are supposed to pay 40% and 50% on their incomes respectively, they are taxed again at 20% or 30% depending on which bracket they belong to.
However, unlike with income earned through on an interest account this amount is not ‘grossed up’ before the extra tax is applied. Only the actual income is subject to the extra tax. This leads to a small tax benefit, which, when dealing with large amounts, can save you a considerate amount.
Whilst the flexibility bonds offer can make them more attractive to savings accounts, they only offer their full benefits to top level tax payers. In addition, experts generally warn against investing at a fixed rate of interest over a long period of time as, if the base rate rises, your investment will effectively well you short.