The fund choice may be changed during the life of a policy perhaps to take advantage of profits from a well-performing fund and move from a under-performing fund, or perhaps to adjust the risk profile.

There are no tax consequences when switching between funds as the policy has not been encashed but merely moved to change the underlying assets. Switching between funds is a simple procedure.  The majority of providers offer at least three switches each year without charge and costs are usually nominal.

Investors can opt to receive a regular repayment of the original capital investment which could be seen as an income but is in fact a return of the original capital investment.

It is possible Under current legislation (tax year 2006/07) to receive a tax-deferred ‘income’ each year, for 20 years, of up to 5% of all premiums paid into the Bond. If not used in one year, the unused 5% allowance (or part of it) can be carried forward to the next year.  This income can be taken at any frequency (yearly, quarterly, and monthly) and provided the total withdrawn does not exceed 5% of the original investment each policy year then there is no further liability to income tax until the policy is encashed.  When the policy is encashed, a further calculation is made to establish the exact tax position and whether or not further income tax is payable.

If you are unsure about your taxation status you should seek professional tax advice as to whether or not this type of investment is suitable for you

For higher rate taxpayers the tax status of unit-linked bonds can make them more attractive when compared to a direct investment in unit trusts and OEICs, but not when compared to the greater tax-breaks available from a unit trust or OEIC held in an ISA.

• No income tax or capital gains tax liability. Is attracted when switching from one fund to another within the bond

• The underlying funds in the investment are subject to corporation tax on income and capital gains at the lower rate (currently 20%), which is lower than the higher rate tax  payable on other investments (currently a maximum of 40%).  There is no further liability to income tax until the bond is surrendered or death occurs giving rise to the payment of benefits, at which point a calculation would be made (for ‘top slicing relief’) to establish any liability, to income tax on any gain.

• Should you be a higher rate taxpayer while the bond is in force but likely to become a basic rate taxpayer in the future (perhaps on retirement) then it may be advisable to defer the surrender until that time.

• There is no personal capital gains tax liability on gains arising on a unit-linked bond to the investor (although the fund is subject to corporation tax on capital gains).

• These types of bond may be less suitable for non-taxpayers or 10% rate taxpayers, since the income tax paid at 20% within the bond cannot be reclaimed.

• Basic rate taxpayers have no additional liability to income tax, unless any gains made from the plan, when added to your current income after top-slicing relief, make them higher rate taxpayers in the year of surrender.

• Investors can withdraw up to 5 per cent of their original investment each year, for up to 20 years, which is treated as a repayment of capital. As such there would be no immediate liability to income tax but with a potential liability being deferred until surrender because previous withdrawals are taken into account in establishing the overall gain on the bond. Indeed, if you remain or become a basic rate taxpayer or surrender then there would remain no additional liability to income tax. Should you be a higher rate tax payer then there would be further income tax to pay – please see the section titled ‘What is top slicing’ below

• A term used to determine whether further income tax is due once an investment bond has been surrendered.

• The total gain on the policy (surrender value less original investment) is calculated.

• The total gain is then divided by the number of complete years the investment has been in force, giving what is termed the ‘average gain’. This average gain is added to the taxable income in the year of surrender.

• If the gain on the policy causes you to become a higher rate taxpayer then additional income tax is due on the proportion of the gain in excess of the basic rate tax bracket, multiplied by the number of complete years for which the bond has been in force. The additional liability would be at the marginal (higher rate minus lower rate) of tax (since the bond has already paid 20%tax).

Bid and offer prices are quoted daily for each fund; units are purchased at the current offer price and sold back to the company at the bid price.  There is usually a difference between the bid and offer prices to cover any initial charges on the plan and this difference is called the ‘Bid- Offer Spread’. The bid and offer prices of many unit linked bond funds can be found in publications such as the Financial Times and the Daily Telegraph.

The flexibility of investment bonds are one of the main advantages as they allow the investor to adjust their investment strategy significantly by switching unit linked funds without giving rise to a tax liability.  Additionally, the tax advantages for higher rate taxpaying investors in that the fund growth are lower than the investor would pay if the investments are held directly.

A disadvantage of a unit-linked bond is that similar to other equity based investments they should be seen as a medium to long-term (usually with a suggested minimum of 5 years). The returns from these types of investment can vary significantly depending on the type of fund chosen and any return achieved will be directly affected by the value of the underlying investments. It should be noted that the annual capital gains tax exemption cannot be used against any gain made under the bond.

Investment bonds can offer a great deal of flexibility in your investment choice whilst offering tax advantages to some investors although 10% or non-tax payers will be disadvantaged since those investors cannot reclaim the income tax paid at 20% within the bond.

Unit linked bonds should be classed as a medium to long-term investment and are susceptible to fluctuations in the level of the investment markets. It should also be remembered that their value can go down as well as up and past performance is not a guide to future returns. 

If you are at all unsure about the suitability of this type of investment for you, then you should seek professional advice from an Independent Financial Adviser and we shall be happy to assist you in making your decision.

Unit linked bonds are not guaranteed to pay a fixed amount.  The fund manager manages the investment fund, and the amount payable will depend entirely on the value of that fund on the date that the bond is surrendered.  The value of the fund and the individual holdings within the fund will be affected by the type of fund chosen, and daily fluctuations within the general market conditions, which will in turn be affected by the attitude to risk, and investment performance. There is no guarantee of the value of the lump sum that will eventually be received.

The risk profile of this investment will be affected by the fund chosen. For example, a ‘cash’ fund would be considered a lower risk investment than if a Far Eastern fund was chosen which may be considered a higher risk investment. The ability to choose a number of funds means that a balanced approach could be achieved with a mixture of different funds.

If you are unsure which funds are suitable to you then you should seek professional advice from an Independent Financial Adviser and we shall be happy to assist you in making your decision.

The risks involved in investing in unit-linked bonds, and the potential return, will vary according to the type of investment fund chosen. The risks are similar to unit trusts, with the fund selection having a large effect on the potential risk.  It must be noted that the value of the units can fall as well as rise, as could the “income” that may be received from them. Therefore, the value of your investment is not guaranteed and you may get back less than you originally invested.

There are numerous funds within the market place in many sectors, which include UK equity based, property based, North American, UK fixed interest or even the Far East.