Investment Bonds are a useful part of an investors armoury – providing a degree of flexibility. In essence a lump sum investment into an Investment Bond (life assurance bond) can provide investors with some good options.

1. You can take up to 5% of the original amount invested each year without giving rise to any tax liability. This is in part taking back part of your original capital, but makes a very useful tax and income planning option. You can also roll up any unused 5%’s – so that you could take several years worth at once. Note that a year is a policy year and not necessarily a tax year.

2. There is no capital gains tax to pay, funds are switched without giving rise to any capital gains. This is currently 18% or 28% depending upon your income.

3. If your Bond has grown after a number of years and you have not withdrawn money from it, it may be in your interests to surrender it and then invest into another Bond. There are some issues here – firstly you might be subject to income tax if you are a higher rate taxpayer at the point of surrender. Secondly this smacks of “churning” replacing a policy with another to generate a commission. That’s why we don’t apply any initial charge on the new Bond. My thinking is that we are already being paid to look after the investment, and that this is merely a part of that “looking after”. The reason you would do this, is simple – the 5% allowance is based upon the original investment. So if your Bond was worth £80,000 and your 5% was therefore £4,000 a year, but you left it to grow – and it is now worth £160,000 the new 5% Bond is £8,000 a year.

I have recently reviewed portfolios within Bonds and sent my advice to clients. These were sent out yesterday. I have advised some fund changes and these need to be returned by Monday 4th October 2010.

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