Guaranteed Income & Growth Bonds

A lump sum investment usually into a type of life assurance policy, which has very little life cover (this is known as a non-qualifying policy), or combination of policies which guarantee a fixed rate of return throughout the term. The terms usually offered are 1, 2, 3, 4 and 5 years.

Examples of Use are that Basic and higher rate taxpayers who can invest a lump sum for a certain number of years.

Advantages

  1. There is no liability to Capital Gains Tax or basic rate income tax on the bond proceeds.
  2. Generally, very competitive rates of return are offered.
  3. There is a fixed level of interest throughout the term of the bond.
  4. Guarantees of either of Income or Growth.

Disadvantages

  1. A liability to higher rate tax may arise on the annual payments from the bond, on surrender or maturity of the bond or on the death of the investor during the term of the bond.
  2. The fixed return offered may become less attractive if interest rates rise or in times of high inflation.
  3. Surrender values before maturity date are not guaranteed.

Points of Interest

  1. The net rates of return can be quite attractive to basic and higher rate taxpayers.
  2. Older investors often have to watch for age allowance being affected.

Investment Trusts

An investment trust is simply a company that has been set up to invest in shares of other companies. By buying shares in an investment company, the investor is in effect spreading the risk that would normally by associated with a single share investment because the value of the Investment Company's shares are directly related to the spread of investments it is making. From a tax perspective, investing in investment trusts is treated the same as investing in shares.  

Points to note about investment trusts are:

  1. They enable private investors with limited funds to get diversified share ownership and without incurring heavy dealing costs.
  2. They enable investors to get exposure to markets that they may not be able to reach themselves (e.g. to emerging countries). Different trusts also have differing objectives (e.g. growth or income).
  3. They enable investors who don't have the skill or inclination to invest directly in companies to get the advantage of professional fund management (although see point below 6)
  4. It is easy for investors to drip-feed money into investment trusts over time by using a monthly savings plans.
  5. Unlike unit trusts, investment trusts are closed end funds. That is, there are a fixed number of shares in circulation, and the price of those shares is determined like other quoted shares - by supply and demand. This means that IT shares often trade at a discount to their Net Asset value (i.e. the value of their underlying investments) and it also makes IT shares more volatile than unit trust prices.
  6. ITs are actively managed funds, which try to produce total returns better than the market average. However once management charges are taken into account, they often fail to meet this target. Hence, the move by many investors to passive funds - trackers and index funds -, which have lower charges.