Many people have historically invested money in a “with-profits” bond – they were popular amongst investors as they were viewed as a “lower risk” investment.

By managing the underlying “with-profits” fund the fund manager could “smooth” the returns enjoyed by investors by keeping back some of the profits in the good times, to allow them to continue paying bonuses in the bad times.

How do Investors benefit from a With-Profits Investment?

An investor would typically benefit from investing in a With-Profits bond in two ways.

Reversionary or Annual Bonuses

The fund manager would typically declare an annual bonus rate applicable to their with-profits fund – this would be a reversionary bonus as a percentage of the initial amount invested as well as a percentage bonus based on previous bonuses already received (a kind of “compounded return” if you like.)

The second way to benefit from investing in a with-profits fund was through the potential payment of a terminal bonus.

In recent years, with UK and world stock markets falling, the bonus rates payable have been very low; in many cases no bonus has been paid.

As a result of the size of the fall in stock markets many life companies are applying “market value reductions” to any surrender from their with-profits fund.

These Market Value Reductions can see the final surrender value cut by anything between 10% and 20% – every plan is different.

The reason for this is to protect remaining investors and to ensure that those people surrendering their with-profits investment are paid a fair amount based on their participation within the fund.

With-Profits Investments – any real future?

With-Profits funds have fallen out of favour with many professionals and investors over recent years. By their very construction they are not “open” in terms of the internal costs and charges involved in running the underlying fund – especially when compared to a “unit-linked” fund where the charges and costs involved are explicit – the investor can see exactly what the costs incurred in running the fund have been.

Another area of concern for many investors is the underlying asset allocation within the with-profits funds. Many funds have reduced their equity content substantially, taking cash and fixed interest positions. This overly-cautious approach to fund management could be to the detriment of future returns within the fund, and hence, lower bonuses.

I Want to Cash In My Investment – Can I Avoid this Market Value Reduction?

There may be a possibility to avoid this MVR on exiting the with-profits fund you are invested in. Many policies were issued with a “MVR Free” guarantee – typically this would be the 10th anniversary of the investment. Many policies offered this guarantee – it was in fact one of the main selling points which many investors may have forgotten about or were not aware of.

Every company is different – some offer the MVR free option on day of the 10th anniversary – some offer it for up to 28 days following the anniversary.

In all cases we strongly suggest that you check the policy document and other papers provided at the time you took out the investment to see what, if any, MVR free guarantees apply to your with-profits plan.

Should I cash in my with-profits investment?

Shrewdcookie does NOT give financial advice – you must take professional independent financial advice before surrendering any investment as there may be tax and charge implications of which you are not aware. The purpose of this article is to bring to your attention the possibility that you may be able to exit your with-profits investment avoiding an unnecessary penalty!

Please tell us your experiences!

We are keen to hear from people who have avoided MVR on surrendering their with-profits investment – please tell us your story below.

What is an investment bond?

An investment bond is, from a technical point of view, a “single premium, non-qualifying, whole of life assurance policy” for which the main principle is one of investment.

They are offered by life insurance companies as a place to invest money over the medium to long term with a view to either providing capital growth, “income” or both.

Non-qualifying relates to the tax treatment of the investment bond – the contract is essentially a life insurance policy which has been designed to be used as an investment vehicle.

Investment Options

The life company offering the investment bond will have a portfolio of funds, possibly both internal and externally managed funds, into which money can be invested. These will cover such asset classes as stocks and shares, commercial property, corporate bonds, fixed interest securities, gilts and government bonds, as well as cash.

Money can normally be invested in more than one fund at a time – typically 10 or more funds at one time is not uncommon.

Taxation of Investment Bonds

Taxation of investment bonds is a little beyond the scope of this article – we strongly recommend that you seek guidance from an accountant or financial adviser before making any amendments to any existing investment bond you may hold.

The investment bond is deemed to have paid basic rate income tax within the fund, however, many funds actually suffer a lower tax charge internally than basic rate income tax as a byproduct of the way the internal returns are broken down between capital appreciation, income in the form of interest and dividends received.

From the public’s point of view, basic rate income tax is deemed to have been paid and the term “non-qualifying” relates to the way any additional taxation may result on taking money out of the plan. A non-taxpayer cannot reclaim any tax paid by the life company within the investment bond.

In what circumstances may a policyholder have to pay additional tax?

The liability to additional taxation comes into play in the event of a “chargeable event”. A chargeable event generally occurs if any, but not limited to, the following happen:

  • Withdrawals in excess of 5% per year – up to 5% of the original amount invested can be withdrawn each year with no immediate additional tax liability – ideal for providing an “income stream” – possibly in retirement.
  • Death of a life assured – if they are the last life assured remaining on the investment bond
  • Partial or full surrender of the bond
  • Assignment of the bond – for money or money’s worth

The calculation of liability to tax is beyond the scope of this article but in brief any additional tax liability is calculated with reference to the individuals own income tax position in the tax year in which the policy year in which surrender takes place ends – phew!!! Ask an accountant or IFA for guidance in this area.

Top Slicing

“Top slicing” of gains on investment bonds generally allows the gain to be divided by the number of complete policy years, after which this “slice” is added to the individuals income for the tax year in question.

If this slice, when added to other income, takes the policyholder into the higher rate tax bracket then some or all of the gain may carry a liability to additional taxation (20% in the current tax year).

Again, seek professional advice before surrendering any investment bond.

Who can benefit from investing in investment bonds?

The ability to take an effective 5% annual withdrawal without any immediate additional higher rate tax liability may be attractive to higher rate taxpayers who may become basic rate taxpayers later in life.

People who have fully utilised their ISA allowances and are actively managing other investments which fully utilise their annual capital gains tax (CGT) allowance.

5% withdrawals are not classed as “income” – this is attractive to individuals over the age of 65 who benefit from higher annual allowances against income tax than under 65’s. For example, in the 2009/2010 tax year, a 66 year old can earn upto £9,490 before paying any income tax. Any income, such as interest or pension annuity, over a set level each year reduces this additional personal allowance,

An additional benefit to retired people is that investment bonds are not normally included in assessing a persons personal finances by a Local Authority in respect of funding long-term care. Care should be taken when considering retirement home planning and investment bonds – any action to move money into investment bonds in the period near to having to go into a retirement home could be deemed “deprivation of assets” by the local authority. More information can be found in the CRAG report.

Investment Bonds are classed as “NIPA’s” – Non-Income Producing Assets which makes them ideal for holding as part of a Discounted Gift Trust (DGT) or Gift and Loan Trust, which are both inheritance tax planning arrangements. Many life offices have their own DGT and Loan Trust packaged schemes with the core investment held in an investment bond due to the favourable tax treatment of investment bonds within a trust arrangement.


Investment Bonds can be viewed as more than just an investment – invariably they are a retirement and estate planning tool and care should be taken in taking any action in regard of investment bonds.