How do government bonds work?

When you buy a government bond, you lend the government an agreed amount of money for an agreed period of time. In return, the government will pay you back a set level of interest at regular periods, known as the coupon. This makes bonds a fixed-income asset.

Once the bond expires, your original investment amount – called the principal – will be returned to you. The day on which you receive the principal is called the maturity date. Different bonds will come with different maturity dates – you could buy a bond that matures in less than a year, or one that matures in 30 years or more.

Key bond terms to remember

• Maturity: a bond’s time to maturity is the length of time until it expires and it makes its final payment – ie its active lifespan
• Principal: the principal amount – or ‘face value’ – of a bond is the amount it agrees to pay the bondholder, excluding coupons. In general, this is paid as a lump sum when the bond matures or expires
• Bond price: the issue price of a bond should, in theory, equal a bond’s face value as this is the full amount of the loan. But, the price of a bond on the secondary market – after it’s been issued – can fluctuate substantially depending on a variety of factors
• Coupon dates: coupon dates are the dates on which the bond issuer is required to pay the coupon. The bond will specify these, but as a matter of course, coupons are paid annually, semi-annually, quarterly or monthly
• Coupon rate: the coupon rate of a bond is the value of the bond’s coupon payments expressed as a percentage of the bond’s principal amount. For example, if the principal (or face value) of a bond is £, and it pays an annual coupon of £50, its coupon rate is 5% per annum. Coupon rates are generally annualised, so two payments of £25 will also return a 5% coupon rate

Government bond example

Say, for instance, that you invested £10, into a year government bond with a 5% annual coupon. Each year, the government would pay you 5% of your £10, as interest (ie £), and at the maturity date they would give you back your original £10,

Just like shares, government bonds can be held as an investment or sold on to other investors on the open market.

Using our above example, say that your year bond is half way to maturity, and that you’ve spotted a better investment elsewhere. You want to sell your bond to another investor, but because better investment opportunities have arisen, your 5% coupon now looks a lot less attractive. To make up the shortfall, you might sell your bond for less than the £10, you originally invested – for example, £

An investor buying the bond would still get the same coupon – £ But their yield would be higher, because they paid less to get the same return. In this case, their current yield would be %.

On the investment risk scale, bonds – sometimes referred to as fixed income investments – typically sit between cash and shares. Bonds however, come in a variety of guises. We look at what you need to know.

In essence, bonds are IOUs issued by governments and companies looking to raise cash. When you invest in a bond, you’re basically loaning a government or company money for a set period of time – usually a number of years. The deal is that in exchange for handing over your cash, you earn a regular fixed rate of interest, known as a ‘coupon’ and when the bond’s life comes to an end and it reaches maturity, your original capital should be repaid in full. The main risk with bond investing is that the issuer could get into financial trouble and find it can’t meet its interest payment obligations, or worse, it goes under and investors lose all of their money as a result.

After they’re initially issued, bonds can trade on the secondary market and swap hands between investors. The price at which they’re bought and sold will generally be determined by two factors – interest rates and how attractive the issuer is, certainly in terms of their solvency.

Bear in mind that these bonds are different to savings bonds (which are usually fixed term bank and building society accounts). Savings bonds are covered by the UK's Financial Services Compensation Scheme (FSCS) but these bonds aren’t. The FSCS currently provides cover of up to £85, per person, per institution in the event that the bank or building society issuing them becomes insolvent.

Government and corporate bonds have no such protection

Investors can either invest directly into a bond or via a bond fund, which will hold a wide variety of fixed income assets to help spread their risk. Aside from making up part of a diversified portfolio, bonds have a number of attractions. They tend to be, historically at least, far less volatile than shares and offer a steady income stream. They may also suit investors nearing retirement who want to move away from riskier assets like equities and retirees looking to yield an income from their wealth, but it’s important to understand that like equities they too can fall in value.

Gilts and government bonds

In the UK, government bonds are called Gilts, in the US government bonds are known as Treasury Bills, or T-Bills, while German federal bonds are referred to as Bunds. In the UK the government also issues Index-Linked Gilts and the interest they pay increases in tandem with the Retail Price Index, to keep in line with the pace of inflation.

Gilts are widely viewed as being among the safest type of bond. However the interest rate, or yield, available from Gilts is usually quite low – as with all investments, to enjoy potentially higher returns, you need to take on more risk. But a loan to a stable government with a strong economy should help to keep your asset allocation reasonably well spread if you already hold other types of investment.

Corporate bonds

Corporate bonds are issued by businesses looking to drum up capital, usually to help with things like expanding into a new market, or to develop some area of the firm. While the interest rate offered by corporate bonds will typically be higher than Gilts, they come with more risk, given that a company is more likely to default on payments than a government. Permanent Interest Bearing Shares (PIBS) are a lesser-known type of bond and are issued by building societies. They’re listed on the London Stock Exchange (LSE) and normally have no redemption date. Some have a 'call' date, which means the building society has the option to redeem the PIB on that date if they wish. The interest payment is usually paid in two equal annual instalments.

Credit ratings

You can get some idea of how safe or reliable a bond is perceived to be by its credit rating. If you plan to buy individual bonds – as opposed to investing via a fund – credit ratings are worth researching at the outset and monitoring over the duration of your investment.

The rule of thumb is the lower the credit rating, the higher the rate of interest offered. But, equally, with a lower credit rating, comes a higher level of risk.

Credit ratings are worked out by specialist credit rating agencies – such as Standard & Poor's and Moody's. The ratings are an assessment of the risk of a company or government not paying back its debt. Investors must take on board that a credit rating (however high) doesn’t guarantee the investment is safe. Some so-called ‘high-yield’ bonds, offer a higher rate of interest but they come with much more risk and are often referred to as ‘junk bonds’.

In terms of ratings, bonds with the most solid appraisal are labelled 'AAA'. Anything from this level down to ‘BBB’ is classified as investment grade and deemed to be lower risk. Bonds given a B and BB rating are classified as 'high yield' and described as speculative, with a high risk of default, while those rated C, CC and CCC, are even riskier.

Those rated D are 'high yield' with a warning that there's a default risk with the bond issuer being unable to pay back debt, in S&P's opinion. This makes it extreme high risk.

Risks

Like all investments, bonds come with risks and you could lose money. Beyond the risks posed by the issuer, bonds are very sensitive to where interest rates are and the direction they’re likely to be headed. For example, when interest rates fall, the fixed rate of income or coupon on offer becomes far more appealing and bond prices rise. However the exact opposite is true when rates rise. Bonds, also suffer during periods of inflation for similar reasons due to the fixed rate of income they provide and vice versa during deflationary periods.

However bond investors are also more protected when it comes to getting their money back than shareholders in a company. This is down to the fact that were a company to go bust, bondholders have preferential treatment to be paid first before shareholders, who receive only what is left after all creditors have been paid. This doesn't mean that the investment is guaranteed if the company does go into liquidation; as there may be no money left to pay bondholders.

An investment bond gives you the potential for medium to long-term growth on your money, investing money in bonds uk, over years or more, along with fund management expertise. You also get access to a mixture of funds, which are looked after by professional investment managers. Of course like any investment, the value can go down as well as up so you might not get back what you put in.

Investment bonds are usually classed as a single premium ‘life insurance’ policy because a portion of your ‘life insurance’ policy can be paid out upon death, but they're really an investment product. So if your need is solely for life insurance, you might want to research other more tailored options. 

That said, you usually buy an investment bond from a life insurance company, or directly through a financial adviser. They will invest your premium on your behalf for potential capital growth, which should build up until you withdraw money from your policy.

You can withdraw up to 5% per year of the amount invested without paying any immediate tax.

Some investment bonds may require a minimum investment term and apply charges for cashing in early. There may also be a minimum investment amount that may range typically between £5, and £10, 

Types of investment bonds

Investment bonds mainly fall into two categories, onshore and offshore. The main difference is their tax treatment, investing money in bonds uk. In high-level terms, those onshore are subject to UK corporation tax, which is offset by your provider, while offshore bonds are issued from outside the UK and the returns roll up gross of tax in the funds, apart from Withholding Tax, as described below. Offshore bonds may also offer a wider choice of funds. 

Other common types of bonds include fixed-rate bonds, corporate bonds and government bonds. Each have their own benefits and risks and the tax situation of each can vary. 

Onshore investment bonds

UK Investment Bonds are non-income producing investments and so have a different tax treatment from other UK based investments. This can provide valuable tax planning opportunities for individuals.

The funds underlying the bond are subject to UK life fund taxation invest google stock that you're treated as having paid Income Tax at the basic rate on the amount of your gain. This notional tax is not repayable in any circumstances. You investing money in bonds uk have no liability to Capital Gains Tax or basic rate Income Tax on bond gains.

Certain events, also known as chargeable events, that can occur during the lifetime of your onshore investment bond may trigger a potential Investing money in bonds uk Tax liability:

• Death giving rise to benefits.
• Transfers of legal ownership of part or all of the bond (though not gifts).
• On the maturity of the bond (only is it right time to buy bitcoin today to Capital Redemption bonds).
• You cash in all your bond or individual policies within it.

You can withdraw up to 5% each year of the amount you have paid into your bond without paying any immediate tax on it, more information on this here.

As you're treated as how to make money quick on fifa 16 paid basic rate tax on the amount of the gain, the maximum rate you would be liable for is the difference between the basic rate and your highest rate of income tax for the relevant tax year. The gains may also affect your eligibility for certain tax credits and you could lose some or all of your entitlement to personal allowances. 

If you're a higher or additional rate taxpayer now but know that you will become a basic rate taxpayer later (perhaps when you retire for example) then you might consider deferring any withdrawals from the bond (in excess of the accumulated 5% allowances) until that time, investing money in bonds uk. If you do this, you may not need to pay tax on any gains from your bond.

Life assurance bonds held by UK companies fall under different legislation.

Special rules apply to trustee held bonds.

Offshore investment bonds

Offshore is a common term that's used to describe a geld anlegen beste zinsen of locations where companies could offer customers growth on their funds that's largely free from tax. This includes "true offshore" locations such as the Channel Islands and the Isle of Man, and other locations such as Dublin. Tax treatment can vary from one type of investment to another, and from one market location to another.

Offshore investment bonds are similar to UK investment bonds, as chargeable events occur on the same events described above cryptocurrency invest 2022 onshore bonds but there is one main investing money in bonds uk. With an onshore bond, tax is payable on gains made (and investment income received) from the underlying investments of the life fund(s) invested in, whereas with an offshore bond no income or Capital Gains Tax is payable on the underlying life fund investments. However, there may be an element of Withholding Tax that can't be recovered. Withholding Tax is deducted from interest and dividends received by the fund(s).

The lack of tax on an offshore bond money making jobs in australia that potentially it could grow faster than one that is onshore, although this isn't guaranteed and the effect of other factors, such as charges, need to be taken into account in any comparisons. But, note that you will pay income tax on any gain at your highest marginal tax rate. This is because on an offshore bond you're not treated as having paid basic rate tax on any gain. The gains may also affect your eligibility for certain tax credits and you could lose some or all of your entitlement to personal allowances.

Top slicing relief for gains on Onshore and Offshore bonds

Top slicing relief is generally available where at least part of your income would be liable to a higher tax rate once you include a gain. If a gain doesn’t move you into a higher tax rate, there may be still be some top slicing relief available due to the effect of the personal savings allowance nil rate and the starting rate for savings.

If top slicing relief applies, you may get a reduction on the tax payable on a chargeable event gain. HMRC have a process for calculating this which can be very complex, so if you would like to understand how this works, please speak to your financial adviser.

Saving for your future, be it a rainy day, investing money in bonds uk, a big anniversary celebration or your retirement, needn’t be complicated. Our Bond can be taken out in joint names, which is ideal for couples wishing to invest. And, with our expert fund managers looking after your investment and the ability to withdraw up to 5% each year tax-free, what is there not to like?

A real-life example

A £10, Investment Bond taken out on 1st July and surrendered on 1st July received a pay out of £14, on the basis of no earlier withdrawals being taken. This is total growth, after charges, of % or % per annum.

Past performance should not be seen as a reliable indicator of future results and the addition of annual and final bonuses is not guaranteed.

• The final bonus rate is based on the year the money was invested into the plan and can change at any time.
• The above graph is provided for information purposes. The potential for future bonuses depends on the performance of the Order Insurance Fund and how we distribute any profit.

Ready to invest a lump sum? Apply today!

Premium Bonds have a special place in the nation’s heart, with over £bn of the lottery-style savings product held by 21 million of us.

Yet, your chances of winning big (or indeed winning anything at all) are pretty slim. So why are Premium Bonds so popular?

In this article we outline:

Related content: Green Savings Total money makeover forum what is it and how can I invest?

What are Premium Bonds?

Premium bonds are a popular way to save your money with a twist.

Rather than offering a guaranteed interest rate, investing money in bonds uk, you have the opportunity to win tax-free cash prizes of between £25 and £1m every month. The annual prize fund interest rate is given as 1%.

So while your cash won&#;t grow while it&#;s invested, you could win a £1m jackpot. Or you could win nothing at all!

If you are lucky to win one of the larger prizes, check out our article, how to invest £10,

Premium bonds are offered by National Savings and Investment (NS&I) which is backed by the Treasury, meaning that all of your money is safe. To add an extra level of security, they are also regulated by the Financial Conduct Authority.

While they offer a fun alternative to an easy access savings account, where the highest rate on offer is around %, the odds of winning anything have got a lot harder.

Your savings also aren’t protected from the eroding effect of inflation.

How much can I invest in Premium Bonds?

You can invest from as little as £25 in Premium Bonds and hold a maximum of £50, This would give you between 25 and 50, entries in the monthly prize draw.

Every £1 you invest is given a unique number and all of these numbers are put into a computer called Ernie (Electronic Random Number Indicator Equipment) which randomly draws out winners.

You can check if you have won by going on the Premium Bonds prize checker webpage

What are the prize amounts for Premium Bonds?

The monthly prize draw offers winners between £25 and a life-changing sum of £1m. Here&#;s a breakdown of the amounts you could win:

• £25
• £50
• £
• £
• £1,
• £5,
• £10,
• £25,
• £50,
• £,
• £1,

Each month, two Premium Bond holders win £1m while six bondholders win £,

You can opt to have winnings paid straight into your bank account or to receive them by post in the form of a warrant (like a cheque).

What is the average rate of return on Premium Bonds?

You don&#;t get a Premium Bond interest rate like you would have with most savings products, instead they have an average rate of return.

For every £1 bond, the odds of you winning a prize are 34, to investing money in bonds uk, so pretty slim. This translates to a &#;prize rate&#; of 1% (down from % last year).

But there are two investing money in bonds uk to remember about these calculations:

• You may not win any Premium Bond prizes, in which case even a investing money in bonds uk rate savings account would have been better
• The more you have in Premium Bonds, the bigger your chances of winning (this is not reflected in the 1% prize fund rate, which is just an average for everyone)

Are Premium Bonds a good idea?

It depends on your financial circumstances. It&#;s not a good idea investing money in bonds uk put all of your life savings in Premium Bonds because you won&#;t earn enough to keep up with inflation (unless you are very lucky and win the jackpot).

Other things to bear in mind:

• It is a bit like gambling so there is no guarantee you will win anything and you would get a higher rate elsewhere
• You might earn more money by contributing into a savings account instead

But if you have invested most of your savings and have several thousand pounds sat in cash, investing in Premium Bonds might be a good option.

Where buying Premium Bonds can really come in handy in this regard is if you have a large amount of money.

For example, you could:

• Invest £,
• Keep £10, in easy access savings
• Set aside another £10, for a cheeky flutter on Premium Bonds for the chance of winning a big cash prize

Alternatively, you could put the whole sum into another of NS&I’s products, such as its Direct Saver account, where the maximum amount you can pay in is £2m.

Like investing money in bonds uk else in the NS&I stable, mit umfragen geld verdienen österreich erfahrungen whole lot is protected by the Treasury.

If you are fortunate enough to win really big money, check out how to invest £50,

What are the advantages of putting money in Premium Bonds?

1. Your money is protected

Premium Bonds are sold by National Savings and Investments (NS&I), which is owned by the government. This means that customers’ money is % protected.

This compares to bank and building society savings investing money in bonds uk, which in the event of the provider going bust, are regulated by the Financial Services Compensation Scheme. The FSCS only protects deposits up to £85, per person, per institution.

However, the maximum you can put into Premium Bonds is £50, so if you opted to put that in a high street bank account instead, you would effectively get the same protection.

2. They are tax-free

Another perk for some people is that Premium Bond prizes are tax-free.

I say it is a perk for some people because most of us have a personal savings allowance (PSA).

This means:

• Basic-rate taxpayers can earn up to £1, in interest on their savings each year without paying a penny in tax
• Higher-rate payers can receive up to £ interest tax-free
• Additional-rate taxpayers (those who pay the top rate of 45% income tax) don’t benefit from the PSA

The allowance means 95% of people don’t pay any tax on their savings interest, so Premium Bonds wouldn’t have any real tax advantage. 

But it’s still reassuring to know that if you do win a big cash prize, it is completely tax-free.

3. You can reinvest

There is also a type of compound interest effect when you win with Premium Bonds.

Rather than take the cash, you can have the money reinvested (unless you already hold the maximum £50,).

Your winnings can buy more bonds. So every £1 you invest buys another bond, whose unique number is entered into the monthly prize draw.

This means your chances of winning increase.

4. An easy access option

Putting money in Premium Bonds could be worthwhile if you’re looking for a temporary home for your cash, and might need fairly quick access to it.

You may not want to tie your cash up in a fixed-term savings account (where you lock up your money up to get a better interest rate), or take the more risky route of investing in the stock market, investing money in bonds uk.

You can withdraw your cash from Premium Bonds at any time via the NS&I website (although it can take up to eight working days for the money to arrive in your bank account).

What are the disadvantages of Premium Bonds?

It is a gamble. You could win £1m, but you could win nothing.

In that respect, Premium Bonds are a form of gambling similar to buying National Lottery tickets rather than being a savings or an investment account.

However, it’s worth remembering that it’s only the “interest” that is a gamble. The actual cash you put into Premium Bonds is safe and remains intact. 

WhenPremium Bonds are worth it

Premium Bonds could be worth investing in if you:

• Have a lot of money to save (the more bonds you have, the bigger your chance of winning a prize)
• Pay tax on savings interest (and have already used up your annual cash ISA allowance)
• Like the idea of a prize draw (you could win big, but you also may not win anything)

It comes down to the type of person you are. Does the element of surprise give you the feel-good factor? How would you feel if you didn’t win anything? 

What are the odds of winning on Premium Bonds?

You have a one in 34, chance of winning the lowest prize of £25 each month for each £1 bond number. 

But these sorts of calculations are tricky and should not be relied upon. This is because there are multiple prizes each month. For example, you could win several £25 prizes and even scoop a £50, prize all in the same month.

The value of the total prize draw also changes each month as it reflects the number of bonds that customers have.

Also bear in mind that you don&#;t get this interest rate as regular income unlike conventional savings accounts.

What are the odds of winning the Premium Bond jackpot?

If you fancy the £1 million jackpot, of which there are two lucky winners each month, then for every £1 bond you hold, in one month, you have a 1 in 56,, chance!

NS&I says the chance of winning the £1m jackpot over the course of a year (or 12 monthly prize draws) is one in 41, if you have £ in Premium Bonds.

If you have £1, invested, the odds of winning are one in 4, And if you have the maximum £50, in bonds, your chances increase to one in 81, 

Each £1 bond has an equal chance of winning. So to boost your chances, the more you buy, the more your chances improve in the monthly prize draw.

So don’t start lingering on any big Premium Bond prize daydreams about property, cars or giving up your job just yet.

If you think you might prefer a regular interest rate: Top savings accounts in

How do Premium Bonds compare with savings accounts?

The nearest thing Premium Bonds have to an interest rate is their “annual prize fund interest rate”, which is currently 1%. This refers to the average prize pay out.

However, the odds of winning nothing can be high depending on how much you have invested and the calculations are not straightforward.

The interest rate applies to the average customer who has an average amount of luck. In other words: the rate doesn’t mean anything to those people who don’t win anything because for them the interest rate is zero.

However, the annual prize fund rate can be used as a guide when comparing Premium Bonds to putting money in a savings account, where you do have a guarantee of earning interest.

We have crunched some numbers to see how Premium Bonds would compare with savings accounts for three different sums of money.

How Premium Bonds compare with savings over a year:

Premium Bonds investing money in bonds uk a 1% prize fund rate

• £1, (£0 won) 
• £5, (£50 won) 
• £20, (£ won)

Online easy access account with a % interest rate

• £1, (£ earned) 
• £5, (£ earned) 
• £20, (£ earned) 

Fixed saver account with a % interest rate

• £1, (£ earned) 
• £5, (£ earned) 
• £20, (£ earned)

In summary: savings accounts are better than Premium Bonds for lower amounts.

If you have got £5, or more, Premium Bonds are a better option (though you&#;ll need to have average luck to beat savings rates), investing money in bonds uk.

How to buy Premium Bonds

If you have read this article and decided you want to invest in Premium Bonds, they can be bought through the NS&I website.

Alternatively, you can buy over the phone by calling (or +44 if you’re outside the UK).

Can I buy Premium Bonds for my children or grandchildren?

You can buy Premium Bonds for any child – a fun and educational gift.

Until the child reaches the age of 16, the parent or guardian nominated on the application takes care of the bonds, no matter who buys them. That nominated person will be sent the bond number and record, any prizes won and payment for cashed-in bonds until the child turns  

You can buy Premium Bonds for kids either by visiting the NS&I gift page, or by filling in an application form and posting it to: NS&I, Sunderland, SR43 2SB.

If you are a grandparent, wanting to give your grandkids a financial leg-up, check out our article: Five ways to invest and save for grandchildren.

How can I check if my Premium Bonds have won?

You can go to the online prize checker on the second working day of the month.

There is also a Premium Bonds prize checker app available for iPhones and Androids. 

The draw tends to take place in the last few days of the month so that NS&I is able to do all the checks it needs to before announcing the winners.

NS&I publishes the big prize Premium Bond winners on the first working day of the month.

Can you lose money with Premium Bonds?

No. NS&I is authorised and regulated by the Treasury, rather than a bank, so % of your money is protected.

Even if you’re an unlucky customer and never win anything, the amount you put into Premium Bonds remains safe. Although not necessarily in terms of the real value of the money.

Unless you win enough to keep up with the rate of inflation, currently %, then your cash is actually shrinking in terms of what it can buy.

How long does it take for Premium Bond winnings to be paid?

If you are one of the lucky winners, bear in mind that it can take up to three working days for your money to reach your account.

But if you haven&#;t received the money in your account after seven working days, call NS&I to make sure that they have the correct bank details for you.

If you want to receive a cheque in the post, be warned they can take till the end of the month to arrive. But if you still haven&#;t received yours after a month, get in touch with NS&I and you will be sent a replacement.

How can I cash in my Premium Bonds?

There are several ways to cash in your Premium Bonds, investing money in bonds uk.

• The easiest way is to use the online service. If you bought the bonds online then you’re already registered. Simply log in using the details you provided .
• You can also cash them in over the phone by calling NS&I on Again because you had bought the phones over the phone you should be registered.
• Either of these options should only take a few minutes. NS&I will cash in your oldest Bonds first and pay the money into your nominated current account.
• You can also cash in your Bonds by filling out the Premium Bonds Cash In form.

What’s an investment bond?

Investment bonds are like an ISA – you can pay money in and take money out as and when you want, investing money in bonds uk. Like ISAs, bonds follow tax-rules that set out how they work and when you might have to pay tax. ISA tax rules are more generous than those for bonds, so most people would only consider an investment bond once they’ve used up their ISA allowance.

Investment bonds can also help with trust and estate planning. Your adviser might recommend a bond as the best way to meet your inheritance planning needs.

The rules for investment bonds mean that they are usually treated as single premium life insurance policies (because most pay out a small amount of life insurance upon death), but they are really bitcoin abc roadmap 32 mb investment product.

Fund choice

When you take out an investment bond, investing money in bonds uk, you’ll usually invest a lump sum into a variety of available funds. The funds and other investment options that are available to you vary by provider. You should consider the funds and investment options you want, before choosing who to invest with.

When you cash-in an investment bond, the amount you get back depends on how well, or badly the investments have done.

Types of investment bonds

There are two types of investment bond; onshore and offshore. The main difference between them is in how the tax rules are applied.

Onshore (UK) investment bonds

As a UK resident company, the funds available through our Select Account investment bond are subject to UK corporation tax. It’s treated as a non-income producing investment, which means it has a different tax treatment from other UK based investments, and this can provide valuable tax planning opportunities.

The tax rules for onshore bonds mean that:

• The underlying fund selection can be switched without generating a personal liability to capital gains tax as the switch is done within the bond itself
• Any dividend income investing money in bonds uk within a fund from UK equities is not taxed
• We pay tax of 20% on any interest and other income received, such as rental income, investing money in bonds uk, from the funds available in the bond
• We pay 20% tax on any capital gains made by funds available in the bond

All this means that HM Revenue & Customs treat the tax paid as being the same as the basic rate income tax even though the actual tax paid in the bond may be less. In practice, this means that people who are basic rate taxpayers when the bond matures or is encashed pay nothing more. If you’re higher or additional rate tax payer or become one when the bond is encashed, then there could be a tax liability which your adviser can discuss with you in more detail.

Offshore (International) investment bonds

Offshore is the common term for investment bonds issued by companies outside of the UK.

Our offshore bonds are issued from the Isle of Man by Canada Life International Limited and CLI Institutional Limited. Both companies are fully authorised Isle of Man resident life assurance companies that have been granted tax-free status by the Isle of Man investing money in bonds uk. We also issue investment bonds from Ireland by Canada Life International Assurance (Ireland) DAC which is not subject to Irish tax where the policyholder is resident outside Ireland.

The tax rules for offshore bonds mean that:

• The underlying fund selection can be switched without generating a personal liability to capital gains tax as the switch is done within the bond itself
• Any dividend income received within a fund from UK equities is free of tax. Dividends from other countries may be subject to a withholding tax and this cannot be reclaimed
• Our international businesses do not pay any local taxes in the jurisdictions in which they are based
• HMRC do not make any allowance for any withholding tax suffered under an international bond

The different way of taxing an offshore bond means that it might grow faster than an onshore bond, although this isn't guaranteed. However, you will pay income tax on any gain at your highest marginal tax rate because with an offshore bond, you’re not treated as having paid basic rate tax on any gain.

Changes that can trigger tax

Certain transactions are treated as chargeable events. When one of these occurs, investing money in bonds uk, a chargeable gain calculation is made to establish if any tax must be paid:

• When someone dies and the death benefit becomes payable
• Transferring ownership (called assignment) for money or money’s worth
• When the bond reaches maturity (if applicable)
• If you withdraw more than the 5% a year tax-deferred allowance
• You cash-in (surrender) all of your bond or individual policies within it

If a chargeable gain arises it will be assessed on income tax, not Capital Gains Tax. This will be based on your tax position at that time, regardless of whether you have paid higher rates of tax in the past.

Tax-efficient withdrawals

5% tax-deferred allowance

One of the main advantages of investment bonds is that you can take withdrawals of up to 5% of the original investment every year, without investing money in bonds uk to pay an immediate tax charge. These withdrawals are treated as a return of capital – the tax is deferred and only becomes payable when the bond is cashed in or matures, if any liability arises. Any unused withdrawal allowance can be carried over to the following tax year.

Deferring income tax can be helpful investing money in bonds uk higher and additional rate taxpayers who want to delay payment until their circumstances change, such as falling into a lower tax band when they retire. It may also help investors who’ve used up their annual capital gains tax allowance.

Withdrawing more than the 5% allowance would result in a chargeable event. The excess amount that’s been withdrawn would be a chargeable gain and could be subject to income tax.

Assigning bonds

Investment bonds can be assigned to someone else without triggering a chargeable event, as long as cash doesn’t change hands, investing money in bonds uk. This means that a higher or additional rate taxpayer can assign the bond to a spouse or partner without triggering a tax charge. This is especially beneficial investing money in bonds uk they’re a basic rate taxpayer or a non-earner.

Income from a bond

Any withdrawals are paid to the policy owner. So if the bond is assigned to a new owner, they can take withdrawals and make use of any unused 5% allowance to defer the tax payable.

We have a range of trusts that can help you manage what happens to the money in your bond. Discover our trust options.

Here, we explain how bonds work, what kind of returns they might offer you, the risks you might encounter, how to invest and what role fixed income assets might play in your investment portfolio.

Why invest in gilts, government bonds and corporate bonds?

If you want a better return than you can get on your cash savings, you will need to accept greater risk. 

Fixed-income investments are generally considered the next step up from cash and tend to be less risky than shares.

They are designed to pay you a steady income and tend not to offer opportunities for capital growth – at least, not in normal economic times. The most common forms of fixed-income investment are:

How do gilts and corporate bonds work?

A conventional UK gilt might look like this:

3% Treasury stock 

Here's what the various elements mean:

• 3% - the coupon rate. This indicates how much you'll receive per year, generally paid in 6-monthly installments.
• Treasury stock - who you're lending to. For corporate bonds, you'll find the company's name here i.e. Tesco PLC 4%
• - the redemption date, when you'll get the principal (your original investment) back.

Returns from gilts and corporate bonds

If you buy £1,worth of Treasury stock 3% gilts, you would receive 3%, or £30, every year until your £1, loan is repaid in The income you receive is called the 'income yield', 'running yield' or 'interest yield' and is paid twice a year (% or £15 every six months, in this instance).

The coupon is determined by the length of time you must wait for maturity and/or the riskiness of the company within which you invest.

The further away the redemption date, the higher the interest you will receive, as you are having to wait longer to be repaid. Similarly, the greater the risk you take on a company, the higher the interest rate you can expect to receive.

Gilts and corporate bonds on the secondary market

You can buy gilts at issue from the government's Debt Management Office, but most gilts, government bonds and corporate bonds are traded on a secondary market, and their value can fluctuate based upon interest rates and the solvency of the issuer.

Bond prices will rise when general interest rates are low, because the rates of interest they pay are fixed and will beat the short-term rates available from banks.

Therefore, you may buy a bond or gilt for an amount above or below the nominal value, and this will have an impact on both how much interest you receive as an income and the amount of money you will receive when the bond matures.

It works like this:

1. If, for example, you paid £95 for a gilt, government bond or corporate bond with a nominal value of £, you will make a capital gain when it matures, as the loan is repaid at the nominal value.
2. Similarly, if you bought the gilt, government bond or corporate bond for £, you would lose out on maturity, as you're only paid back at the nominal value.
3. The amount of interest you'll receive will also change dependent on the price you paid. If you buy a bond or gilt paying 6% for, say, £95, the effective interest rate you'll receive is higher than 6% as interest is paid on the nominal value, not the second-hand market price you paid.
4. In this example, the rate you receive is actually % (i.e. 6%/£95 = %).

What is the 'redemption yield' of a gilt or corporate bond?

The redemption yield is a rate of return that combines the interest rate you get based on the price at which you buy the gilt, government bond or corporate bond, and the profit or loss you get if you hold the bond to maturity.

If you bought a gilt, government bond or corporate bond at a price that's lower than the launch price (£), the redemption yield will be higher than the running yield, as you're set to make a profit when the bond matures.

Conversely, if you bought a gilt, government bond or corporate bond at a price that's higher than the launch price (£), the redemption yield will be lower than the running yield, as you'll make a loss if you hold the bond to maturity.

Green gilts and green corporate bonds

Green bonds work just like any other corporate or government bond.

Essentially, the funds that would be raised through green bonds would have to be directed to renewable energy and clean energy projects.

In September the UK began issuing Sovereign Green Bonds (or 'Green Gilts').

What are the credit ratings of gilts and corporate bonds?

Gilts, government bonds and corporate bonds are given credit ratings by companies, such as Standard and Poor's, and Moody's.

Gilt, government bond and corporate bond credit ratings

This table shows the Standard and Poor's ratings on gilts, government bond and corporate bonds, along with what they can tell you about the health of a particular company or government bond.

Getting to grips with the issuer of a bond and its rating is key to understanding how you can make money from bonds. As with all investments, the greater the risk you take, the greater potential return you could make. Inevitably, this also comes with greater potential for loss.

How do I buy gilts and corporate bonds?

There are two main options if you want to buy fixed-income investments – you can invest directly in individual bonds or you can invest in collective investments such as unit trusts.

Direct investment in gilts and corporate bonds

You can buy gilts directly from the government's Debt Management Office.

You can buy corporate bonds from the London Stock Exchange's Retail Bond Platform. They require a minimum investment of £1, Unlike shares, they don't give you a stake in the company, but make you a creditor, ranking above shareholders in the pecking order if the company becomes insolvent.

You may not get your full investment back in this instance – only a proportion of the assets that are left. But while shareholders will lose everything if a company goes bust, bondholders often recoup a significant proportion of their capital.

You're not covered by the Financial Services Compensation Scheme, so it is important to assess the strength of the business you are lending to.

You can also buy gilts and corporate bonds through a stockbroker or fund investment platform.

Investing in bond funds

Bond funds are collective investments, such as unit trusts or open-ended investment companies (Oeics). These funds pool your money with other investors' and invest it in a broad range of gilts or bonds.

Unlike direct investment, there is no maturity date with bond funds. The manager invests in dozens, or even hundreds or different bonds or gilts.

By investing in multiple bonds within a fund, you are able to spread risk. You can expect to pay an annual charge of between % and 1% for investing through a corporate bond or gilt fund, or much lower if you choose a corporate bond or gilt-tracker fund.

There are two types of gilt funds available to investors:

• gilt funds, which must have 80% invested in UK gilts
• index-linked gilt funds, which must have 80% invested in UK index-linked gilts.

There are four types of corporate bond funds available to investors:

• corporate bond funds, which must have 80% invested in investment-grade corporate bonds
• global bond funds, which must have 80% invested in overseas investment-grade corporate bonds
• strategic bond funds, which must have 80% invested in fixed-income assets, including convertibles (bonds that can be converted to shares), preference shares and permanent interest-bearing shares
• high-yield bond funds, which must have 80% invested in high-yield bonds.

On the investment risk scale, bonds – sometimes referred to as fixed income investments – typically sit between cash and shares. Bonds however, come in a variety of guises. We look at what you need to know.

In essence, bonds are IOUs issued by governments and companies looking to raise cash. When you invest in a bond, you’re basically loaning a government or company money for a set period of time – usually a number of years. The deal is that in exchange for handing over your cash, you earn a regular fixed rate of interest, known as a ‘coupon’ and when the bond’s life comes to an end and it reaches maturity, your original capital should be repaid in full. The main risk with bond investing is that the issuer could get into financial trouble and find it can’t meet its interest payment obligations, or worse, it goes under and investors lose all of their money as a result.

After they’re initially issued, bonds can trade on the secondary market and swap hands between investors. The price at which they’re bought and sold will generally be determined by two factors – interest rates and how attractive the issuer is, certainly in terms of their solvency.

Bear in mind that these bonds are different to savings bonds (which are usually fixed term bank and building society accounts). Savings bonds are covered by the UK's Financial Services Compensation Scheme (FSCS) but these bonds aren’t. The FSCS currently provides cover of up to £85, per person, per institution in the event that the bank or building society issuing them becomes insolvent.

Government and corporate bonds have no such protection

Investors can either invest directly into a bond or via a bond fund, which will hold a wide variety of fixed income assets to help spread their risk. Aside from making up part of a diversified portfolio, bonds have a number of attractions. They tend to be, historically at least, far less volatile than shares and offer a steady income stream. They may also suit investors nearing retirement who want to move away from riskier assets like equities and retirees looking to yield an income from their wealth, but it’s important to understand that like equities they too can fall in value.

Gilts and government bonds

In the UK, government bonds are called Gilts, in the US government bonds are known as Treasury Bills, or T-Bills, while German federal bonds are referred to as Bunds. In the UK the government also issues Index-Linked Gilts and the interest they pay increases in tandem with the Retail Price Index, to keep in line with the pace of inflation.

Gilts are widely viewed as being among the safest type of bond. However the interest rate, or yield, available from Gilts is usually quite low – as with all investments, to enjoy potentially higher returns, you need to take on more risk. But a loan to a stable government with a strong economy should help to keep your asset allocation reasonably well spread if you already hold other types of investment.

Corporate bonds

Corporate bonds are issued by businesses looking to drum up capital, usually to help with things like expanding into a new market, or to develop some area of the firm. While the interest rate offered by corporate bonds will typically be higher than Gilts, they come with more risk, given that a company is more likely to default on payments than a government. Permanent Interest Bearing Shares (PIBS) are a lesser-known type of bond and are issued by building societies. They’re listed on the London Stock Exchange (LSE) and normally have no redemption date. Some have a 'call' date, which means the building society has the option to redeem the PIB on that date if they wish. The interest payment is usually paid in two equal annual instalments.

Credit ratings

You can get some idea of how safe or reliable a bond is perceived to be by its credit rating. If you plan to buy individual bonds – as opposed to investing via a fund – credit ratings are worth researching at the outset and monitoring over the duration of your investment.

The rule of thumb is the lower the credit rating, the higher the rate of interest offered. But, equally, with a lower credit rating, comes a higher level of risk.

Credit ratings are worked out by specialist credit rating agencies – such as Standard & Poor's and Moody's. The ratings are an assessment of the risk of a company or government not paying back its debt. Investors must take on board that a credit rating (however high) doesn’t guarantee the investment is safe. Some so-called ‘high-yield’ bonds, offer a higher rate of interest but they come with much more risk and are often referred to as ‘junk bonds’.

In terms of ratings, bonds with the most solid appraisal are labelled 'AAA'. Anything from this level down to ‘BBB’ is classified as investment grade and deemed to be lower risk. Bonds given a B and BB rating are classified as 'high yield' and described as speculative, with a high risk of default, while those rated C, CC and CCC, are even riskier.

Those rated D are 'high yield' with a warning that there's a default risk with the bond issuer being unable to pay back debt, in S&P's opinion. This makes it extreme high risk.

Risks

Like all investments, bonds come with risks and you could lose money. Beyond the risks posed by the issuer, bonds are very sensitive to where interest rates are and the direction they’re likely to be headed. For example, when interest rates fall, the fixed rate of income or coupon on offer becomes far more appealing and bond prices rise. However the exact opposite is true when rates rise. Bonds, also suffer during periods of inflation for similar reasons due to the fixed rate of income they provide and vice versa during deflationary periods.

However bond investors are also more protected when it comes to getting their money back than shareholders in a company. This is down to the fact that were a company to go bust, bondholders have preferential treatment to be paid first before shareholders, who receive only what is left after all creditors have been paid. This doesn't mean that the investment is guaranteed if the company does go into liquidation; as there may be no money left to pay bondholders.

Saving for your future, be it a rainy day, a big anniversary celebration or your retirement, needn’t be complicated. Our Bond can be taken out in joint names, which is ideal for couples wishing to invest. And, with our expert fund managers looking after your investment and the ability to withdraw up to 5% each year tax-free, what is there not to like?

A real-life example

A £10, Investment Bond taken out on 1st July and surrendered on 1st July received a pay out of £14,, on the basis of no earlier withdrawals being taken. This is total growth, after charges, of % or % per annum.

Past performance should not be seen as a reliable indicator of future results and the addition of annual and final bonuses is not guaranteed.

• The final bonus rate is based on the year the money was invested into the plan and can change at any time.
• The above graph is provided for information purposes. The potential for future bonuses depends on the performance of the Order Insurance Fund and how we distribute any profit.

Ready to invest a lump sum? Apply today!