Investment bonds from insurers and platforms

An investment bond is a lump sum investment sold by a life insurance company. Technically it is a single premium investment that often includes a relatively small amount of life insurance, usually bought from a major insurer based in the UK, the Channel Islands, the Isle of Man or Dublin¹. Although the rules treat it as a single premium life insurance policy, it is really an investment product, and it is bought mainly for the way it is taxed rather than for the insurance element².

The feature most people buy a bond for is the withdrawal allowance. You can normally take out 5% of the original capital you invested for each complete year you have held the bond, up to a maximum of 20 years, without triggering an immediate tax charge³. Those withdrawals are tax-deferred, not tax-free: the tax is settled when the bond is finally cashed in or another chargeable event occurs. This page explains how onshore and offshore bonds differ, how the 5% allowance builds up, when tax falls due, and what protection you have if things go wrong.

What an investment bond is and what it is used for

An investment bond is a way of holding a portfolio of investments inside a life insurance wrapper. You pay a single lump sum to an insurance company, the company invests it, and any growth builds up inside the bond without you paying tax on it year by year as you would with a general investment account. Because the bond is technically a life insurance policy, a small death benefit is usually bundled in, but this is normally a token amount, such as returning the amount invested, and is not the reason people buy the product¹.

The main use of an investment bond is tax planning for money that has already been through other options. ISA tax rules are more generous than those for bonds, so most people would only consider an investment bond once they have used up their ISA allowance². Bonds are also used for estate planning: they can be written in trust so the proceeds bypass the estate, and they can be assigned to someone else without triggering a chargeable event, as long as cash does not change hands².

Because the bond is an insurance policy rather than a bank account, it behaves differently from savings products. There is no fixed interest rate and no capital guarantee unless the specific bond offers one. The value of your investment can go down as well as up and you may get back less than you invest². What you get in return is the tax-deferred growth and the 5% a year withdrawal allowance described later in this page.

Onshore or offshore: how the two kinds of bond differ

Investment bonds come in two varieties, and the difference is where the issuing company is based. Onshore bonds are issued by UK insurers. Offshore, sometimes called International, bonds are issued by providers based outside of the UK².

The practical difference is how growth is taxed inside the bond. An onshore bond is subject to UK life fund taxation, which the insurer pays on your behalf inside the product. An offshore bond grows without that underlying tax, which means it might grow faster than an onshore bond, a feature known as "gross roll up", although this is not guaranteed². The trade-off comes at the end: when a chargeable event occurs on an offshore bond, the whole gain is assessed under the rules for foreign life insurance policies, and you settle the tax then⁷.

Neither version is automatically better. Which suits a particular person depends on their tax position now, their expected tax position when they cash the bond in, and how long they plan to hold it. The rules for foreign policies are set out in HMRC's helpsheet HS321, and the equivalent rules for UK policies in HS320, and both are worth reading before committing a large lump sum⁷.

Who can invest and how much

Investment bonds are single premium products: you pay one lump sum at the start rather than contributing monthly. Minimum investments vary by provider and by whether the bond is onshore or offshore, and some bonds are available only through a financial adviser rather than direct. The key features document for any bond you are considering states its minimum, and there is no standard figure that applies across the market.

Who a bond tends to suit is easier to state. Because ISA tax rules are more generous, most people would only consider an investment bond once they have used up their ISA allowance². Beyond that, bonds tend to be used by people with a lump sum to invest for the medium to long term who want control over when tax falls due, people planning to pass money to family, and trustees, because bonds can be held in trust and assigned without triggering a chargeable event².

Tax rules depend on the type of investment and individual circumstances and may change², so the figures that made a bond worthwhile when it was taken out may not hold years later. The general guide to investing covers the other ways to hold investments, and where to hold investments compares ISAs, pensions and general accounts.

Investments you can hold inside a bond

What sits inside the wrapper depends on the bond. Insured bonds typically offer a range of the insurer's own funds, covering the main asset types: equities, bonds, property and cash. A bond fund alone might hold as many as 200 different bonds⁸, so even a single fund choice inside a bond can be broadly diversified. Some bonds, often called "portfolio" or "wrapper" bonds sold through platforms and advisers, let you hold a much wider range of investments, including funds from other managers.

The choice of funds inside the bond drives both the risk and the return, in the same way it would in any investment fund. A bond invested entirely in equities will behave very differently from one invested in a mixed or cash-based fund. The insurer's fund range, and any restrictions on switching between funds, are set out in the bond's literature.

If you are comparing a bond with holding the same funds directly, the fund charges and ongoing charges figure page explains how to read fund costs, and diversification and asset allocation covers how to spread risk across asset types.

Charges: provider, adviser and fund costs

An investment bond can carry several layers of cost, and they compound. The first layer is the product charge: the insurer or platform levies an annual fee for running the wrapper, often a percentage of the bond's value. The second is the cost of the underlying funds, which is separate and shown in each fund's documentation. The third, where advice was given, is the adviser's charge.

Some structured products carry one-off entry costs on top. The FCA's rules on disclosing costs and charges list examples for consumer composite investments: structuring costs including market-making and settlement costs, costs for capital guarantees, implicit premiums paid to the issuer, and stamp duty or similar tax⁹. These are embedded in the price rather than billed separately, which is why two products that look similar can return very different amounts.

One category of bond has its own tax charge. Personal Portfolio Bonds, a type of offshore bond giving broad investment choice, give rise to an annual charge under the tax rules⁷, which is a further cost of holding that kind of wrapper. The investment platform fees page explains how percentage fees eat into returns over time, and how much a financial adviser costs covers advice charges.

The 5% withdrawal allowance and how it carries forward

The withdrawal allowance is the feature that defines investment bonds. You can take 5% of the original capital amount invested, for each total year the bond has been held, up to a maximum of 20 years³. The allowance is cumulative: if you take nothing in year one, you can take 10% of the original capital in year two, and so on.

The allowance is subject to a maximum of 100% of the premiums paid, which will be reached if 5% of the premiums are taken for 20 consecutive years⁴. In other words, the deferred tax cannot be deferred forever: once you have withdrawn everything you put in, or once 20 years have passed, the clock stops.

Two things catch people out. First, the allowance is measured against the original capital, not the current value: if the bond has grown, 5% of what you invested is a smaller sum than 5% of what it is now worth. Second, the deferral is not exemption. When the bond is finally cashed in, the whole gain is calculated and taxed, and the withdrawals you took along the way are part of that calculation³. A reader's insurer put the practical effect plainly: £5,000 can be taken from each bond without incurring tax, and after more than 20 years held, 100% of the original capital could be taken with no tax bill³.

Gains are taxed as income, not capital gains

When a chargeable event occurs, the gain on the bond comes under income tax rules, not capital gains tax rules³. This is the single most important thing to understand about the product, and it cuts both ways.

The downside is that you lose the capital gains tax toolkit. Chargeable event gains are taxable as income rather than capital gains, so capital losses and the annual exempt amount cannot be used against them⁷. You cannot offset losses on other investments against a bond gain, and there is no CGT annual allowance to shelter it. The capital gains tax rate on carried interest for individuals is 32%⁵, but that figure is irrelevant here: a bond gain is stacked on top of your income and taxed at income tax rates, which reach 40% for higher rate taxpayers on non-savings income⁵.

The upside is top slicing relief, which can spread a large one-off gain across the years the bond was held, so a gain that would otherwise push you into a higher band may be taxed partly at lower rates. The calculation is done through your self assessment return, using the HMRC helpsheets for UK policies (HS320) and foreign policies (HS321)⁴.

Regular withdrawals need care in a different context. Where amounts of capital are regularly withdrawn from a bond, those amounts can be assessed as income, for example when a benefits calculator works out your net income¹. The how investments are taxed page sets out the wider picture.

One point on compensation: if you are awarded compensation for investment loss, the business will not deduct capital gains tax for you¹⁰, so any tax arising on a compensation payment is yours to settle.

Assigning, joint owners, trusts and what happens on death

Investment bonds are unusually flexible in how they can be owned and passed on. A bond can be assigned to someone else without triggering a chargeable event, as long as cash does not change hands². This makes bonds a common tool for passing money to family: a parent can assign segments to a child, and the child later cashes them in, with the gain taxed on the child rather than the parent.

Bonds can also be held jointly. NS&I, for its savings bonds, allows investment in your own name or jointly with one other person¹¹, and insurers offer the same on investment bonds. Where money is held jointly, it is worth recording what each owner contributed and what should happen if circumstances change. A deed of trust can include details such as how much each joint owner paid, and what should happen to their money if the relationship breaks down, one person cannot pay their share, or the asset is to be sold¹².

Trusts are common with investment bonds because the assignment rules make transfers clean. Where a bond is held in trust, the trustees control it and the proceeds are paid to the beneficiaries outside the estate, subject to the trust's terms and to inheritance tax rules on gifts into trust.

On death, what happens depends on the product. For NS&I's Green Savings Bonds, if the holder dies the money in the bond becomes part of the holder's estate and the bond continues to earn interest; an inherited bond can be transferred into the beneficiary's name even if that takes them over the investment limit for that issue, though no more bonds of that issue can then be bought¹³. Half of a jointly held Green Savings Bond counts towards each investor's personal limit¹³. NS&I index-linked certificates behave similarly: on death they become part of the estate and continue to accrue index-linked interest, remaining free of income tax, and personal representatives can cash them in or transfer them to beneficiaries¹⁴. Investment bonds typically pay a small death benefit, and the gain crystallised on death is a chargeable event handled through the deceased's or the estate's tax position.

Debts can complicate inheritance. In Scotland, if you pass away while in a protected trust deed, the trust deed continues, and your estate pays your debts and the costs of managing the arrangement before anything goes to your family¹⁵.

Investment bonds are not savings bonds

The word "bond" causes real confusion, because the products most people know by that name are savings bonds, and they are completely different from investment bonds. A savings bond, such as the fixed term products from NS&I, is a deposit: your capital is guaranteed, you earn interest, and the only question is the rate.

NS&I's Income Bonds, for example, have no set investment term and can be cashed in at any time with no notice and no penalty¹⁶. Interest is paid without deducting tax, but it is taxable and counts towards your Personal Savings Allowance¹⁷. MoneyHelper makes the same point about fixed rate savings bonds generally: interest is paid gross, and you might have to pay tax on it if it is above your Personal Savings Allowance, while some savings bonds are available within a tax-free ISA¹⁸.

The investment limits on NS&I savings products show the scale of difference from insurer bonds. British Savings Bonds accept from £500 to £1 million in each issue¹⁹, Premium Bonds from £25 up to a maximum holding of £50,000²⁰, and Green Savings Bonds between £100 and £100,000²¹. Guaranteed Growth Bonds add interest without deducting tax, but that interest is taxable income for UK income tax purposes²².

If your priority is a guaranteed return with access rules you understand, the savings accounts guide covers deposit products. If you want to know whether investing rather than saving suits your money, see when investing makes sense instead of saving.

Where FSCS protection does and does not apply

The Financial Services Compensation Scheme covers a range of financial products if a UK-authorised financial firm fails, including deposits, insurance, investments, pensions and mortgage advice²³. But the cover has edges, and with investment bonds it is the edges that matter.

The first condition is authorisation. FSCS protection applies only where the authorised firm's activity is regulated by the PRA or the FCA²⁴. This is the key question for offshore bonds: a bond issued by a provider based outside the UK may not be covered at all, and a provider's status can be verified on the FCA Register, with the provider asked directly what FSCS protection applies. The FSCS's own guidance on investment protection, and its checker tool, set out how to verify this⁶.

The second is what is protected. Long-term insurance, which is the category an investment bond falls into, is covered differently from deposits: whole of life assurance claims are protected at 100%, while property claims under general insurance are protected at 90%²⁶. Compulsory general insurance bought through a failed broker is protected at 100%, and all other general insurance at 90%²⁷. Some insurance claims are not eligible at all: goods in transit, marine, aviation and credit insurance are excluded²⁶.

The third is what FSCS does not cover. It will not compensate customers for client money shortfalls in certain structured products, as in the T1IV bonds case, where FSCS stated it will not compensate customers in relation to any client money shortfalls deriving from those bonds²⁸. FSCS also does not protect money paid under an individual voluntary arrangement arranged by insolvency practitioners, which are not regulated by the FCA²⁹. And FSCS does not cover poor investment performance: it covers the failure of a firm or bad advice, not the market going against you. The pages on FSCS and poor performance and FSCS and advice cover these boundaries.

If you were badly advised to buy a bond, the mis-sold investments page explains the complaints route, and the Financial Ombudsman Service can award compensation where a complaint succeeds¹⁰.

Risks: capital erosion, tax bills and changing terms

The risks with investment bonds fall into three groups.

The first is investment risk. The value of your investment can go down as well as up and you may get back less than you invest². As NS&I puts it for its own investment products, the value of your investments can fall as well as rise³⁰. Systemic risks beyond any manager's control include interest rates, inflation, wars and recession⁸. Because withdrawals reduce what remains invested, taking the 5% allowance each year from a falling bond accelerates capital erosion: you are taking a fixed slice of the original sum from a pot that may be shrinking.

The second is tax risk. Tax rules depend on the type of investment and individual circumstances and may change². A bond bought when you were a basic rate taxpayer may produce a gain taxed at 40% if your income has risen by the time you cash it in⁵. And because gains are taxed as income with no access to the CGT annual exemption or loss relief⁷, a large gain in a single year can land in a higher band than the same growth spread over many years elsewhere. Top slicing relief helps, but does not remove the effect.

The third is product risk: charges can rise and terms can change. There is no standard notice period for charge increases on investment bonds in the rules that govern them, so the answer is in your bond's own terms and conditions. By comparison, in the separate world of payment services, framework contracts entered into from 28 April 2026 require at least 90 days' notice before certain changes take effect³¹, but that rule does not extend to investment bonds. Providers of NS&I savings bonds, for their part, contact customers with their options at least 30 days before a bond matures²³.

If a bond has gone wrong because of the way it was sold rather than the market, free help is available: the Financial Ombudsman Service handles complaints at no cost to the consumer¹⁰, and MoneyHelper provides free guidance on investments. The investment risk page covers how to think about how much risk to take.