Bonds vs equities: which is safer and what you actually own

Bonds are usually described as lower risk than equities, and in one narrow sense that is true: bond prices generally move less than share prices, and a bond promises to repay a set amount on a set date. But lower risk is not no risk. Bond prices move up and down daily and you could get back less than you invested¹. A company or government that issues a bond can fail to repay it. And the worst outcomes in this market have not been gradual: London Capital & Finance went into administration in January 2019, and nearly 12,000 people collectively lost £236m².

The distinction that trips people up most is in the name. A bond you buy on a market is a loan to a government or a company. An investment bond is a life insurance product that holds funds, and it behaves nothing like a bond. A bond fund sits in between: it holds many bonds, sometimes as many as 200 different ones, which spreads the risk of any single issuer defaulting but does not remove market risk³.

This page sets out what each asset is, how their prices behave, what they cost to hold, where the lower risk of bonds stops applying, and what happened to mini-bond investors and the compensation they received.

Mini-bonds and the London Capital & Finance collapse: what bond investors lost

Mini-bonds typically offer bumper returns but come with a much higher risk and very little protection, and are usually issued by smaller companies and start-ups⁷. They are not the same as the bonds a large company or government issues, and they were not covered by the usual investment compensation rules.

London Capital & Finance offered mini-bonds that promised tempting rates of return². The company went into administration in January 2019⁷. The collapse saw nearly 12,000 people collectively lose £236m². Around 97% of all LCF bondholders had invested less than £85,000².

The government set up a compensation scheme for investors in the failed minibond issuer⁴. The scheme paid 80% of bondholders' principal investment in eligible bonds⁴. That is a partial recovery, not a full one, and it came after a lengthy process rather than automatically.

The regulatory response was swift. The FCA introduced temporary product intervention measures from 1 January 2020 to 31 December 2020 to address the risks⁸, and in March 2020 the FCA permanently banned the mass marketing of speculative mini-bonds². The FCA classifies speculative illiquid securities as very complex and high risk⁵, and its own risk summary states plainly:

The wider lesson is about what "bond" means in an advert. A mini-bond is not a savings product with a fixed return, and the word bond carries an implication of safety that these products do not have.

Bonds and equities: what each one is

A bond is a loan. You lend money to a government or a company, and in return it pays you interest and repays the loan at a set date. Pension schemes invest in bonds (fixed-income investments) issued by corporations and governments, alongside equities (shares in companies), property, infrastructure and other alternative investments⁹.

An equity, or share, is part-ownership of a company. You do not get a promise of repayment. You get a share of whatever the company is worth and whatever it pays out, which can rise or fall.

The two behave differently because the promise behind them is different. A bond's return is contractual: the issuer has agreed to pay. A share's return is residual: shareholders get what is left after everyone else is paid. That is why bonds are generally seen as safer, and why they generally pay less.

The risk ladder most guides use runs cash, then bonds, then property, then equities. Property is generally seen as having a lower investment risk than equities and a higher risk than cash and bonds¹. Investing is often talked about as a long-term commitment of 5 to 10 years or more, over which equities usually provide better returns than cash, bonds and property¹.

Corporate bonds sit above government bonds on that ladder. They are generally viewed as having more investment risk than government bonds, and bonds from large, well-known companies are usually seen as less risky than those from smaller, less well-known companies¹. In most cases corporate bonds carry a greater risk than those issued by major governments or banks¹⁰.

Are bonds safer than equities?

Usually, on price movement. Not always, and not in every sense.

The case for bonds being safer rests on three things. The issuer has promised to repay a set amount. Bond prices generally move less than share prices. And government bonds in particular are generally seen as safe because the repayments are guaranteed by the government¹. The bonds with the least risk of default are those from high-quality sovereign issuers such as the UK and the larger and wealthier European countries¹⁰.

The case against treating them as safe is about what "safe" leaves out. A portfolio with a greater proportion of bonds and cash will be lower risk, but leaves your money vulnerable to being eroded by inflation³. That is the trade-off in one sentence: less volatility, less growth, and a real chance of losing purchasing power.

There is also default risk, which is small for gilts and real for companies. And there is the risk that comes from the product wrapper rather than the asset. Investing in the stock market is risky, and when you invest you could lose money¹¹. That statement is not limited to shares.

The honest answer is that bonds are lower risk than equities in the sense that matters most to most people: the day-to-day value of a bond holding moves less, and the income is more predictable. They are not lower risk in the sense of being unable to lose money. They can, and the LCF case shows how badly.

Price swings: bond prices generally move less than share prices

Bonds are viewed as having a lower risk than equities and property¹. That is the core of the comparison, and it holds most of the time.

It does not hold always. Prices can move up and down on a daily basis and you could get back less than you invest¹. Bond prices fall when interest rates rise, because new bonds issued at higher rates make existing lower-paying bonds less attractive. They also fall when the market worries about an issuer's ability to repay.

Equity prices move more, and the swings can be violent. In March 2023, UK and European bank equities fell by 17% and 18% respectively¹³. In 2022 the mini-Budget under former Prime Minister Liz Truss triggered a sharp sell-off in UK government bonds, pushing up borrowing costs and shaking investor confidence¹⁴. That is the point worth holding on to: government bonds are the safest asset on the ladder, and they still had a serious sell-off.

For context on how large investors hold these assets, UK-funded occupational pension schemes saw a slight decline for total central government bonds and corporate bonds between end-December 2020 and end-March 2021¹⁵. Within long-term debt securities, the main types of investment were central government bonds including UK government gilts¹⁶.

Investment bonds are not the same as bonds

This is the confusion that costs people money, because the two products share a name and nothing else.

An investment bond is technically a single premium investment which often includes a relatively small amount of life insurance, usually purchased from a major insurance company based in either the UK, the Channel Islands, the Isle of Man or Dublin¹⁷. When you invest through an investment bond, you will usually invest into a number of funds, and the fund manager is responsible for deciding which assets to invest in¹.

A bond fund is different again. Investment funds pool your money with that of other investors to give you a stake in tens or hundreds of stocks, bonds or other types of investments¹⁸. With a bond fund, you might be invested in as many as 200 different bonds³.

So there are three things called bonds, and they behave differently:

• A bond is a loan to a government or company. You can hold it directly or through a fund.
• A bond fund holds many bonds. It diversifies issuer risk but still moves with the market.
• An investment bond is an insurance wrapper that holds funds. Its risk depends entirely on what is inside it.

Investment trusts, which are sometimes confused with all three, are more risky than bank savings accounts but offer the chance of a growing income and potentially capital growth too¹⁹. Investment is not suitable as a way to get out of debt²¹.

With-profits bonds and funds closed to new money

With-profits funds are a legacy product, and many are shut to new investors. Aviva states that it has a number of with-profits sub-funds and although they are generally no longer available for new investments, some pension schemes can still invest or switch in²². The fund invests in a broad range of assets that include, for example, shares, property and government bonds, and it is classed as a low to medium risk fund²².

Aegon closed its Deposit Administration Fund 2 and its with-profits bonds to further investment on 30 September 2002²³. On 30 April 2015, the WP2, DAF and with-profits bonds funds were closed to single premium investments including switches, while renewal and regular premium increments continue to be accepted²³. New annual bonus rates for with-profits funds calculated in advance take effect from 1 April 2026: Life With-Profits Bonds and Pensions WP2 funds move to 3.75%, Pensions DAF to 2.50%, with nil rates for DA2 and other Deposit Administration contracts²³.

If you hold one of these older products, the practical questions are whether you can still pay in, what the exit terms are, and whether a market value reduction applies. The fund being closed to new money does not mean your money is trapped, but it does mean the fund is being run down rather than grown.

Charges on bonds and equity funds

Charges are where the comparison gets less tidy, because the wrapper often matters more than the asset inside it.

Investment trusts that invest in more specialist assets such as property, private equity or infrastructure are likely to have higher charges than those that invest in more conventional assets such as shares or bonds²⁴. As most investment trusts are actively managed, they tend to have higher charges than tracker and index funds²⁷.

That gives a rough ordering. A tracker fund holding government bonds is usually the cheapest way to hold bonds. An actively managed bond fund costs more. A specialist trust costs more again. And an investment bond adds an insurance wrapper on top of whatever the underlying funds charge.

The historical cost of mis-selling in this area is documented. Investment bonds sold outside an ISA where a tax benefited equity ISA was more suitable accounted for £92m of annual consumer detriment between 2010 and 2020¹⁶. That figure is about unsuitable sales rather than charges, but it points at the same problem: the wrapper was chosen for the seller's benefit rather than the buyer's.

On tax, the rules for investment bonds are specific. The insurance company can confirm that £5,000 can be taken from each bond without incurring tax¹⁷. If the bond does not include any element of life insurance, the value of the bond is normally assessable in full and should be entered under 'Other investments' on the Capital page²⁸. That distinction matters for anyone claiming means-tested benefits.

Where the lower risk of bonds does not apply

There are four situations where the usual "bonds are safer" rule breaks down.

Mini-bonds and speculative illiquid securities. These are very complex and high risk, and investors often lose 100% of the money they invested⁵. The FCA banned their mass marketing to retail investors in March 2020².

Unregulated investments. These are not covered by the rules of the Financial Conduct Authority⁶. The FSCS can only protect you if the firm was authorised by the Prudential Regulation Authority or the Financial Conduct Authority and if your investment was a regulated product⁶. If either condition fails, there is no compensation scheme behind you.

Inflation. A fixed-rate savings bond will not hold its value in real terms if the interest you are getting is less than the rate of inflation over the investment period²⁹. The same arithmetic applies to any bond whose interest is fixed and low.

Concentration. A single bond from a single issuer is one promise. If that issuer fails, the loss is total. A bond fund spreads that risk across many issuers, which is why the fund structure matters as much as the asset class.

There is also the question of who is selling. The FCA has taken High Court proceedings seeking to stop Hunter Jones carrying out regulated activity and require money to be returned to investors³⁰. Where a firm is not authorised, the protections that make bonds feel safe do not exist.

What protects you, and where it stops

The protections that apply to investments are real but conditional.

The Financial Ombudsman Service can look at complaints about regulated firms. In one case involving a personal pension, the ombudsman found that a more cautious investing approach, whilst not offering the same return potential as equities, would have been better suited to the consumer³¹. That is the standard the ombudsman applies: was the recommendation suitable for this person, not was it the highest returning.

The FSCS covers investments only where the firm was authorised and the product was regulated⁶. It does not cover poor performance, and it does not cover unregulated products.

For anyone who has lost money, the routes are the firm's own complaints process first, then the Financial Ombudsman Service, then the FSCS if the firm has failed. Free, impartial guidance is available from MoneyHelper, and debt advice charities can help where investment losses have created debt problems.

The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 do not apply to contracts for services of a banking, credit, insurance, personal pension, investment or payment nature³². That means the standard 14-day cancellation right you get on many purchases does not automatically apply to investment products, and any cooling-off period comes from the product's own terms instead.