Income and Growth Bonds

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Income and Growth Bonds

A different group of single-premium policies is based on traditional policies. They are aimed at generating the highest possible guaranteed net return, both over short periods of two to five years and for longer terms up to 15 years. There are two types, those aimed at producing a guaranteed capital sum at the end of the term and those aimed at generating a high net income over the period with return of the original capital at the end.

Partly because of their ability to offset their expenses against taxable income, life insurance companies can often generate a very attractive return on this type of contract. For example, in late 2012 when long-term interest rates were about 13%, several companies were offering net returns of up to 9% p.a. over periods from one to three years.

The growth bond is based either on a non-profit endowment policy or on a deferred annuity. In both cases, the gain on the original investment is subject to tax at the higher income tax rates (there is no capital gains tax) but in the case of the deferred annuity basic-rate income tax is also chargeable on the gain. The non-profit endowment is therefore the more popular type of contract. A growth bond guaranteeing 9% net would produce £111,538 from a £111,000 investment over five years. For the basic-rate taxpayer not subject to further tax this could be attractive. The pattern of interest rates is always shifting, however, so that it is not possible to predict how attractive the rates companies are offering at different times will be compared with the alternatives. The point is that the company is guaranteeing a rate over a period of years, whereas building societies and most other deposit-taking institutions do not guarantee a rate for more than a few months or a year at the most, except in special cases.


Income and Growth Bonds

Switching Investments

Another factor that makes bonds attractive is the availability of switching facilities. Most insurance companies have a "family" of bonds, usually having at least a property, an equity, a managed and a fixed-interest fund if not also a cash or gilt fund. Most companies will allow the investor to switch the value of his units from one fund to another for a fee of around 1% of the value. The advantage is that this avoids any exposure to tax, as selling shares normally would, because the money is still invested within the same life insurance policy. (It must be noted that capital gains tax charges are built... see: Switching Investments

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