Compare Critical Illness

Those investing with capital gains from equities as their objective will therefore normally be better off investing in unit trusts than in equity-linked critical illness insurance bonds. The reinvestment benefit helps to produce capital growth over a period of years, which is fine for the investor interested in capital growth, but not for one who wants to draw an income from his investment.

However, bonds can be used for this purpose, too, because the bondholder is allowed to withdraw a proportion of his original investment each year without any current tax liability. Since the Finance Act 1975, the taxation of bonds has become quite complex, but the basic position is as follows. If you invest in a single-premium investment bond, you may withdraw over 20 years a sum equal to the original investment without incurring any current tax liability.

This is equivalent to 5% per annum, which is also the maximum annual income you may draw to begin with. But if you forgo it for a period, then the withdrawal rate may be higher later. For example, if you take no income for the first five years, you may then use up the full allowance in the next 15 years, or over a longer period at a lower rate. The “income” is taken by selling the appropriate number of units back to the company, and whether the amount you take is more or less than the actual income earned by your capital in that period will depend on the yield on the fund’s investments.

For the 5 percent to come solely out of income, the fund would have to be earning 8 percent before tax. So long as the capital value is also growing, however, many investors will be happy to draw off a small proportion of it as income. (Capital and income are not distinguished in the unit price, because all income earned is reinvested within the fund and is therefore reflected in the unit price). With critical illness insurance you could be sure to have the peace of mind.