What Are Mis-Sold Investment Bonds?

Ian Lewis[1]

Ian Lewis

Money Savings Advice What Are Mis-Sold Investment Bonds?

There are many different ways to invest your money if you want to see your savings grow. One of your options is to save your money in Investment Bonds.

Investment Bonds can be confusing – sometimes promoted as a savings product and other times as life insurance – so getting to grips with what this product involves can help you decide if it’s suitable. With Investment Bonds, as with other types of investment product, your money could grow, or you could discover you’ve lost out.

If you’re sold an investment bond product without being made aware of the risks or of the various charges and costs involved, you might have been mis-sold it, and you could be entitled to compensation.

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What are Investment Bonds?

Think of Investment Bonds like a savings account. The money you pay in is invested in stocks and shares. Your money might grow if your investments do well, but you could lose out if they don’t. At any time, you can sell your shares and withdraw the money you’ve paid in.

Lump-Sum Investment Bonds

Investment Bonds are sometimes known as Lump Sum Investment Bonds. This is the only option because you need to make your full deposit in one go.

You can’t add to an Investment Bond once you’ve made your first investment. If you want to invest more, your only option is to have another product with the same provider or a different one.

Paying into Investment Bonds

With Investment Bonds, you need to pay in with a lump sum. You invest your money in one go.

You can’t usually invest unless you have at least £500 to pay up-front. Many providers have higher minimum investment values for their products.

You can’t add to your Investment Bonds monthly. Once you’ve paid in, the money is locked away until you decide to withdraw it. You could choose to open another Investment Bond, but you can’t add to the ones that you’ve already opened.

When you first open an Investment Bond account, you must be clear about how much you want to pay in. You can’t make changes later, and withdrawing your money may result in extra fees and charges. The money you put in is locked away, and you can’t invest more later on.

Minimum Investments for Investment Bonds

It’s very unlikely that you’ll be able to invest less than £500 in Investment Bonds. Even that is considered a very low investment. Most providers will ask you to invest at least £5,000 or £10,000.

If you want to set aside a bit of spare cash, but you’ve got less than £500, then Investment Bonds are not the right product for you. If you have more than £500 but less than £5,000, you may be able to use Investment Bonds, but your choice of providers will be limited.

There are many different providers and insurers that offer Investment Bonds. Each will have its own rules, so it’s a good idea to shop around and find a suitable provider. While some will be happy to accept smaller deposits, others are more suited to investors with a lot of money to spare.

Where Your Money Is Invested

Once you’ve opened your Investment Bond and deposited your money, it will be invested into a fund that combines several different stocks and shares. Some investments are professionally managed, whilst others automatically track the stock market.

You can choose the fund or portfolio; your money is invested in. You might choose to invest in government, green and ethical companies, property, or SMEs. You’ll be given a choice of funds and portfolios, so you can choose the one that’s right for you.

Some funds and investment portfolios are riskier than others. The higher the risk of something going wrong, the more money you might make if things go right. Playing it safe means your investments won’t grow as much as if you take a big risk, but there’s also a much lower chance of losing a lot of the money you’ve invested.

Spreading your investments will always be the best way to protect your money. The more you spread your investments, the less chance you’ll have of a dramatic loss of money all at once.

Diversifying your investments can help you spread the risk, putting your money in several different places so you’ve no chance of losing it all. Diversification might mean investing in several industries or investing some of your money in corporations and the rest in government bonds. Diversification might also mean that you invest your money in several different countries so that your investments don’t all depend on one economy.

When it comes to claiming for a mis-sold investment bond, it’s important to be clear that you can’t claim to have been mis-sold just because you lose money. They are a risk-based product, and if there’s evidence that this has been explained to you in the contracts you’ve signed, you can’t claim just because things didn’t work out.

Mis-sold investment bonds will be where the broker acts in a way that wasn’t agreed or where the risks weren’t made clear to you, but that’s extremely rare. The most common forms of mis-sold investment bonds are where the various charges involved aren’t inherently clear, such as where the broker’s commission isn’t detailed in full.

Can You Move Your Investments?

Once you’ve chosen a fund or portfolio, you’re not required to stick to it. In most cases, you can choose to move your investment to a different fund. There are typically no additional charges for transferring your investments, so if you find that a fund’s not working out, you can choose to invest in something different.

Many people don’t settle on one investment fund for life. It’s wise to monitor markets and economies, make changes to reduce your risk, and take advantage of growth areas. If someone’s actively managing your investments, they should be able to use their knowledge and experience to boost your returns.

Life Insurance with Investment Bonds

With Investment Bonds, you’ll also receive a life insurance product. The money you’ve invested will payout upon death, so you can be sure that you won’t lose the money you’ve paid in. Your Investment Bonds can be left in your will to a loved one or your choice of beneficiary.

As Investment Bonds are a long-term investment, it’s reassuring to know that the money you’ve invested isn’t lost if you pass away. You can be sure that the money will go to the loved ones that you want as the recipients.

Why Choose Investment Bonds as Life Insurance?

There are several reasons why Investment Bonds might be better than a life insurance policy.

Life insurance policies are typically fixed-term, so they’ll eventually expire. Any money you’ve paid in, if you outlive your policy, is lost. Once your policy term ends, you’re no longer covered, and you don’t get any money back. Investment Bonds don’t usually have a fixed term, and the money’s always yours. Whether you pass away or choose to cash in your bonds, you’ll always get money back minus any investment losses.

Many people like that they can withdraw some money every year from their Investment Bonds. This makes them more flexible than life insurance policies, as you can’t take back any money you’ve paid in life insurance premiums. With Investment Bonds, if you found that you needed the money for something else, you could simply withdraw it.

Why Might a Life Insurance Policy Be Better?

Investment Bonds require full payment upfront. You’ll need to make a lump-sum payment, and this should typically be at least £5,000 (and ideally more). If you’re using Investment Bonds for life insurance, you’ll want to invest as much as possible to help your loved ones.

You can’t top up your Investment Bonds later, nor can you pay in monthly. With life insurance, you’ll pay a monthly premium, so you’ll be spreading the cost.

Investment Bonds don’t guarantee a payout of a certain amount. Your investments could result in growth or loss, and there’s no telling what the value will be on the day that you pass away.

Can I Have Life Insurance and Investment Bonds?

You can have both life insurance and Investment Bonds. It’s a good idea to have life insurance, as these policies will pay out agreed sums even if you’ve paid in a lot less. If you die quite close to your policy start date, your loved ones will still receive the amount that your policy covered you for. A standard life insurance policy will guarantee payment upon death.

Investment Bonds are a lot less predictable than a standard life insurance policy. You can’t be sure exactly what state your investments will be in when you die. Also, your loved ones will only receive the money you invested plus growth.

Having both Investment Bonds and a life insurance policy will ensure that your loved ones are protected and will also provide some flexibility for you whilst you are alive. You can also be sure that there’s always some money to pass on to your loved ones or dependents, unlike with a life insurance policy that might reach the end of its term.

Investment Bond Tax Liabilities

You’ll pay tax on withdrawals and gains from your Investment Bonds. However, every year you can make some withdrawals tax-free.

Each year, make a tax-free withdrawal of up to 5% of your original investment amount. So, if you originally invested £8,000, then you’d be able to withdraw up to £400 per year without any immediate tax. This doesn’t mean that tax never applies, but that you don’t need to pay it when you make your withdrawal. When you eventually cash in your Investment Bonds, the withdrawals you’ve made are added to final calculations for that year’s profit. Fortunately, unless your profits will push you into the higher tax band, you’ll continue to pay just 20% tax on gains.

Money in Investment Bonds will be ringfenced whilst it’s invested. Your gains won’t be subject to Capital Gains Tax. Investment values are instead subject to a standard 20% tax rate. This matches the Basic Rate tax, so if you’re a Basic Rate taxpayer, then you won’t pay anything more when your investment bonds mature.

Some people use Investment Bonds during preparations for retirement. They store their money away until they’re no longer in a Higher Rate tax bracket, then they withdraw the money at a slow and steady pace to dodge the tax bills.

Investment Bonds can be used for trust funds or to manage inheritance tax liabilities. You might put money in Investment Bonds to pass it on to someone else upon your death or to save money for several years as a gift for a child or grandchild. You can transfer Investment Bonds to somebody else without additional taxes applying, and you can also determine how the money is held in trust for a dependent. Whilst money is wrapped up in an Investment Bond, it can change hands without any tax liabilities. You could pass your Investment Bonds onto someone else without additional taxes applying.

Withdrawing More than 5%

If you withdraw more than 5% of your initial investment in one financial year, and if you haven’t already saved your allowance by rolling over from previous years, then any withdrawals above the 5% may be subject to Income Tax.

After you’ve made your withdrawal, if Income Tax needs to be charged, your provider will inform you of your tax liability, and you’ll need to inform HMRC.

If you’re a Higher Rate taxpayer, keeping your money in Investment Bonds could avoid the need to pay 40% tax. You can then withdraw the money at a later date, such as after your retirement or when your income is reduced.

Joint Investment Bonds

Investment Bonds can be held as joint products, in two names. This can be useful for parents or grandparents, saving money for younger family members.

Investment Bonds can also provide security for your spouse. The money invested in a Joint Investment Bond will belong to both bondholders equally. If you pass away, the investment continues for your partner (and vice versa). The life insurance cover doesn’t take effect when the first bondholder dies but will ensure that the money is safe when the second bondholder passes away.

Joint Investment Bonds act like any other joint savings product, though you’ll need to agree how the money is invested and if any withdrawals will be made.

Who Should Use Investment Bonds?

Investment Bonds aren’t the best financial products for saving or tax reduction. This means that they should never be your first port of call if you find that you’ve got some spare cash.

If you have money to save or invest in, there are several other products that could serve you better than an Investment Bond. Of course, this doesn’t mean that they don’t have any place at all. Investment Bonds can be used for tax and inheritance planning if other avenues have already been exhausted or if it’s found that they’re the best way to hold money in a trust for someone else.

Benefits and Drawbacks of Investment Bonds

Investment Bonds can be complex and confusing. Many people don’t have the time or inclination to get to grips with these products. For a majority of people, an Investment Bond is not the best way to save money.

Understanding the benefits and drawbacks can help you make the most of Investment Bonds if they’re a suitable option and help you find a better product if Investment Bonds aren’t right for you.

Drawbacks of Investment Bonds

There are already several products that are better for tax management, savings and investments. ISAs, and even many pensions, will better meet most consumer needs.

Investment Bonds are only really suitable for relatively complex tax planning, as they require you to carefully determine when’s best to make a withdrawal.

Unless you have a lot of money and you’ve already used several other products, it’s highly unlikely that Investment Bonds will be a worthwhile choice of product. They have quite a narrow relevance, catering specifically to people that already have an ISA, already have pensions, likely also have an existing life insurance policy, and still have spare money to invest.

Benefits of Investment Bonds

If you've already used up your annual ISA allowance and all your pension allowances, Investment Bonds become a useful product for reducing your tax liabilities. Though these other products are best used first, Investment Bonds are helpful if you've lots of money spare and you want to store it without the need to pay tax on this money straight away.

If you can plan to withdraw just 5% of your original investment each year, you can provide yourself with a regular tax-free income. Of course, how much income this provides will depend on your initial investment. If you only invested £500 to start, you can only withdraw £25 per year before you'll start paying tax. If you've invested £250,000, you could withdraw £12,500 every year without immediate tax payments.

Even better, this allowance accumulates, so you could withdraw 100% tax-free if you can avoid withdrawing money for 20 years. If you avoid withdrawals for just five years, you'll already be able to withdraw a hefty 25% of your investment. Meanwhile, that money will hopefully have been growing if your funds have done well.

Investment Bonds can be a valuable way to plan for your future, so you can store money whilst you have plenty coming in and then use it when your income is lower.

Are Investment Bonds Protected?

As well as being offered a life insurance policy that pays out what you've invested if you die, your Investment Bonds are covered by the Financial Conduct Authority. Investment Bonds are regulated as long as you're careful to use a regulated provider.

Investment Bonds are typically covered by the Financial Services Compensation Scheme (FSCS). As a result, if your provider is in default, you should claim the full value of your fund back in compensation.

If your investment bond was mis-sold, it would be a case for the Financial Ombudsman Service (FOS) rather than the FSCS.

Onshore and Offshore Investment Bonds

If you want to make use of Investment Bonds, it's a good idea to get professional financial advice. Investment Bonds' tax rules can be very complex and only become even more confusing when Offshore Investment Bonds are considered.

Choosing between Onshore and Offshore Investment Bonds can affect the level of risk you're taking and the gains you'll end up making. Your choice can also affect your tax liability, so it's certainly worth seeking financial advice to ensure that you understand the implications.

Onshore Investment Bonds

With Onshore Investment Bonds, you'll invest your money in UK companies and organisations. You can easily transfer from one fund to another without liability for Capital Gains Tax, and you'll pay tax at a 20% rate for interest and gains from your investments.

If you’re a Basic Rate taxpayer, you won’t pay anything else when your investment matures.

Offshore Investment Bonds

If you want to invest outside the UK, you’ll find that you have a far wider choice of funds and portfolios. Companies outside the UK do not pay tax to HMRC, so your investments won’t be taxed at 20% in the same way as in the UK. As a result, you will need to pay tax on all your profits and gains at your usual rate. Offshore Investment Bonds have their benefits. You’ll have more choice, and your investments might do better than a strictly UK-only fund. However, be prepared for additional tax liabilities

How Long Should Investment Bonds Be Used for?

Like all forms of investment, your Investment Bonds should be treated as a mid-to-long-term product. Investments can be like a rollercoaster, with lots of ups and downs, and withdrawing too early might not give you time to wait for the ride to get smoother.

If you expect to need the money back soon, investing in shares might not be the wisest decision. Only invest money, you can stand to lose, and only if you can keep it locked away for long enough to see your money grow. Withdrawing too early from Investment Bonds may also leave you subject to additional penalties and charges.

It’s advisable to keep your Investment Bonds for a minimum of five years. Most people invest for longer, keeping their money invested for ten years or more.

Most Investment Bonds are whole-of-life, so they’ll keep going for as long as you want them to. The investment will remain until your death or until you choose to surrender your investment and cash out. Rarer are fixed-term Investment Bonds, which cash out at the end of a previously agreed term length.

Most people will treat their Investment Bonds as a life insurance policy, preparing for a time once they’re no longer around but with the flexibility to make withdrawals early if they decide that they’d like to. Having that flexibility can sometimes help in unexpected situations.

Money Savings Advice Tip

If you feel your investment bond was mis-sold then you could be entitled to thousands in compensation. Our top tip is to get expert compensation advice from a compensation specialist and Money Savings Advice can help you.

What Returns Can You Expect on Your Investment Bonds?

Evidence shows that, whilst your investments might have some years better than others, on average, you can expect returns of about 4% to 7% annually. Some people will find that their investments do much better, while others might even have years to lose out financially.

A lot of investment growth will depend on your timing. You want to buy shares and funds at low prices, then withdraw when those prices have risen. That way, you’re selling your shares for much more than you originally purchased for. The longer you can invest, the more likely you are to find the point where you’ve enjoyed greater gains.

As many people use Investment Bonds as a form of life cover for their loved ones, you may never know the final value of any investments you’ve made. Roughly speaking. However, around 90% of investors see some growth overall.

What Happens When You Cash in Investment Bonds?

When you cash in your Investment Bonds, you’ll pay tax on any profits and gains. If you’ve made use of your 5% tax-free withdrawals in previous years, these will be included in your final tax calculations.

All Investment Bonds gains are taxed at 20%, and this money comes straight out of your investment.

Once you cash in your Investment Bonds, if the gains have taken you into a higher tax bracket, then you may be required to pay more tax at the point of cashing in. Otherwise, your gains have already been taxed at 20%, so there is no more tax to pay.

The tax situation will be slightly different if you’ve invested offshore, as the companies that you’ve chosen to invest in may not have paid tax in the UK. Your financial advisor can help you to estimate how much tax you’re likely to be paying.

How to Get Investment Bonds

If you’ve considered the benefits and drawbacks of Investment Bonds, and you’re happy that they’re the most suitable way for you to store and grow your money, then you can invest in bonds directly by choosing an insurer or provider.

Most people don’t invest directly but instead, choose to contact a Financial Advisor who can help to find suitable products.

Your Financial Advisor can help you to decide if Investment Bonds are the best option. They might be able to find a better way to use your money, as Investment Bonds are usually only worthwhile once several other options have been used. For example, you might do better to use your ISA or pensions allowances.

Consider how Investment Bonds can be used for your financial planning. If you’ve decided that you want to go ahead and purchase Investment Bonds, then you should choose a trusted provider that the FCA regulates. You can search the Financial Services Register to make sure that providers are genuine.

Compare Investment Bonds by taking into account the minimum and maximum deposit amounts, as well as whether or not there’s a fixed term length and how your investments will be managed. Also, check that you’re happy with the funds and portfolios on offer and how you can access your account if you’d like to keep an eye on your investments. Most Investment Bonds can be monitored online, but some still require a lot of paperwork, whilst others are even more accessible with smartphone apps.

Where to Find Investment Bonds

Most people will purchase Investment Bonds through a well-known bank. Other options are to get Investment Bonds from an insurance provider or to choose a smaller bank or a building society.

Remember that you don’t just need to have one product and invest with one provider. You can have as many different Investment Bonds as you’d like, as long as you have enough money to meet the minimum deposit requirements.

Investment Bond comparison websites can help you research your options, but remember that you’re dealing with high monetary values and investments that come with some risk. Before making a final decision and investing your money in bonds, sit down and have a conversation with your financial advisor. Once your money is deposited and applied to a fund or portfolio, there’s no way to withdraw it again without considerable fees.

When Can You Claim for Mis-Sold Investment Bonds?

If your investment bond wasn’t sold to you clearly and correctly, then you might be able to claim compensation. Mis-sold investments are surprisingly common – that’s not to say that most are mis-sold, but at the same time, it’s not exceptionally rare for customers to have a case.

Investment sales advisors have a responsibility to provide a duty of care for their customers. They should only sell them an investment bond if it’s right for them, and that involves checking a number of factors:

  • Does the customer have existing investments that render the new one an unnecessary risk?
  • Does the customer have the right financial security in case an investment risk doesn’t pay off?
  • Does the customer fully understand the nature of the risk involved, and could they manage fine if they lost their investment?
  • What are the customer’s aims with the investment, and are they financially achievable and responsible?
  • Is the customer of a suitable age, and are they free of any clashes with their occupation?
  • Does the customer understand all of the features of the investment product?

The advisor must also make clear how much commission they are due to make on the sale of the product and detail all charges in full. If the information is left vague, then the customer could argue that they weren’t fully aware of where their money was going, and therefore that the product was mis-sold.

How Do You a Compensation Claim?

If you feel that your investment bond was mis-sold, your first point should be to make a formal complaint to the advisor and organisation that sold it to you. They should have the time to address your complaint and either offer you a resolution or an explanation as to why they feel the product was sold to you correctly and fairly.

Once you’ve heard back from them – or if you feel that their response isn’t correct – you can escalate your case to the Financial Ombudsman Service (FOS), who will investigate as a neutral third party. They’ll require evidence of your financial history and of the contract you signed for the investment bond, along with specific information related to the reason behind your claim.

The FOS will review your case, checking whether any advice was misleading or whether your bond was suitable for you. They will then return their judgement which is final – you won’t be able to appeal.

How Much Money Could You Get in Compensation?

If your case makes it to the FOS, any compensation will be required to put you back into the financial situation you would’ve been in had you not received the bad advice. So if you were mis-sold, you might have your initial investment returned. If the fees weren’t detailed correctly, you might have that portion of the initial cost returned to you. You might also be offered the chance to move to a more suitable investment product rather than a direct monetary award.

If you’re offered compensation by the institution who sold you the investment bond before it gets to the FOS, consider whether this is sufficient to replace the money you’ve lost due to the bad advice. It’s worth seeking the expert help, as the compensation offered might be a lower amount, and you may be advised to reject it and escalate your case.

How Can Money Savings Advice Help You Check If You Are Due Compensation?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Financial Claims management companies. They have already helped thousands of people claim compensation for a mis-sold investment bonds and they can do the same for you.

Choosing an independent claims management company means they won’t proceed with a claim unless they are sure it is in your best interests. They are also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these claim management companies who can help you make a compensation claim, then click on the below and answer the very simple questions.

Money Savings Advice Author Ian Lewis

Ian Lewis

Ian Lewis is one of our specialist financial writers. Ian has over 15 years of financial writing experience, having worked for some of the largest financial publications in the UK covering topics from mortgages, equity release, loans and financial claims, to name a few.

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