An investment bond is in fact a whole of life policy usually paid for with a lump sum or single premium.

Proceeds can be taxable if the investor is a higher rate taxpayer and may also be taxable for lower rate taxpayers.

The money invested is used to buy units in a selected fund. Most insurance companies offer a wide range of funds from low to high risk.

Investment Bond Special features
5% of the original investment can be withdrawn each year for 20 years (until entire capital is returned), deferring taxation until final encashment. The main Advantages of an investment bond are given below.

• a packaged investment for growth;
• can take income by cashing in units;
• simple to operate;
• wide range of geographical funds available.

Types of investment bond include With profits, distribution, guaranteed growth and unit linked.

These are intended as a medium to long term investment. If you withdraw from this investment in the early years you may not get back the amount invested.

With profits bonds
With profits bonds tend to be very popular with the more conservative investors as returns are smoothed. The underlying investment funds usually consist of a balanced portfolio of UK investments, overseas equities, fixed interest stock, cash deposits and sometimes property.

Annual bonuses are usually added to the policy, but there is no guarantee of the bonus rate from year to year. This depends on the performance of the underlying investments within the bond and the level of smoothing adopted by the life company.

Part of the with profits fund growth is held on reserve - the balance is declared as a bonus. Using reserves allows a 'smoothing out' of performance.

The with profit bonus rate may not look very competitive in years of good stock market returns, however the reverse is generally true when stock market returns are poorer. There is also a bonus payable on maturity known as the terminal bonus although this is not guaranteed.

Distribution bonds
These provide income and the underlying investment fund tends to be invested in income producing assets. This type of fund is useful for the investor taking withdrawals from a bond, as interest or dividend is taken rather than original capital.

Guaranteed income and growth bonds - Income bonds offer a regular, annual or monthly payment at a guaranteed rate for a fixed term. At the end of the term the original investment is returned.

The guaranteed growth bond, as its name implies, offers guaranteed growth on capital at the end of a fixed term say five years. These types of bonds should not be used if you are at all likely to cash in early.

Surrender values are often not available and if they are given they will result in a lower yield than the guaranteed rate. Some guaranteed growth and income bonds are written as single premium endowment policies.

Stock market bonds
These products allow exposure to the stockmarket, and generally offer the greater of the return of the capital invested or the performance in the FT-SE or other stockmarket index over a given time period.

This is intended as medium to long term investment. If you withdraw from this investment in the early years you may not get back the amount invested.