A bond can be a great way to invest a lump sum. On average, you will need a minimum of £5,000 and unlike other products you can’t top it up.

You can choose to spread your lump sum across a range of different funds. Funds allow investors to pool their money together, to take advantage of buying in bulk, spreading the money across lots of different investments and gaining access to an expert who would normally be too expensive to ask advice from on your own. All funds have different investment objectives and levels of risk.

A great feature of an investment bond is that you can withdraw up to 5% of your initial investment each year, for up to 20 years, without immediately having to pay any income tax. The only time you may have to pay some income tax is when a ‘chargeable event’ occurs (e.g. cashing in your bond or making larger withdrawals). At this time, only higher rate income tax payers, or those in receipt of certain income related allowances (e.g. age allowance), may have to pay some income tax on their gains (around 20%).  This product should be viewed as a long-term investment. You also need to be aware that there could be penalties for accessing your money.

Pros

• Access to a wide range of funds. Some funds are exclusively accessed through investment bonds, such as with-profits funds.
• The funds you choose to invest in are up to you.
• The funds will be managed by experts.
• Potential tax savings for some people.
• Each year you can withdraw up to 5% of the amount you paid in, for up to 20 years, without paying any immediate income tax. If you are not a higher rate taxpayer you can withdraw more than this without a personal tax liability.
• A very small amount of life insurance is included.

Cons

• As with all investments in the stock market your money is not guaranteed and you could get back less than you invested.
• You usually need a minimum of £5,000 to invest.
• Only suitable as a long-term investment.
• You’ll have to pay some management charges.
• If you cash in all or part of the bond in the early years, you may have to pay some extra charges.
• You may have to pay some extra income tax when you cash in all or part of your bond.
• Life insurance companies pay tax on their investment funds, and this tax can't be reclaimed by a non-taxpayer.
• The law relating to tax may change in the future.

If you’re looking for higher potential returns than investing in a savings account, and have a lump sum to invest then investment bonds could be an option for you. There are also potential tax advantages if you are a higher rate income tax payer.

However as with all investments in the stock market your money is not guaranteed and you could get back less than you invested. Additionally if you cash in all or part of the bond in the early years, you may have to pay some extra charges. If you’re not sure if this type of product is for you speak to a financial adviser.

You can buy investment bonds either direct from a financial company, through a financial adviser, banks and building societies or a fund supermarket. But before you hand over your cash, make sure you know about the charges, what types of funds you would be investing in and that it fits with your investment goals and attitude to risk.

You could speak to a bank or financial institution you already have a relationship with, but bear in mind they can sometimes only advise you on their own products. If you want an overall view of the marketplace, it’s best to speak to an independent financial adviser.

Get advice – investing can be risky and you should get advice from a financial adviser before buying.

Don’t panic – you don’t have to withdraw your money every time your investment drops in value, it could just as easily go back up.

It’s worth doing your research – there are lots of funds to choose from and its good to choose one to suit your personal financial circumstances.