Investment Bonds vs Platforms? Where Would Your Money Have Maximum Growth Potential?

Are you looking for ways to maximise your investment returns? Thinking about tax-efficient investing in the form of investment bonds? Or pondering whether investment platforms would be better? Then you've come to the right place. In this blog, we're about to explore the advantages and disadvantages of investment (or life insurance) bonds vs platforms.

We know that financial planning can be a headache – but it doesn’t have to be. There’s a lot to understand when deciding between platforms vs bonds. From tax implications to fees, to how your choice should be impacted by investment goals and timelines – it’s complex. But we want you to come out at the end of this with an understanding of how to reach the best investment decisions for you.

Get ready to learn about:

  • The benefits of investment bonds
  • The tax advantages they offer
  • The potential pitfalls to watch out for
  • How platforms might provide a more flexible and potentially lucrative alternative.

By the end of this blog, you’ll be armed with the knowledge you need to make smart investment decisions that work for you.


What is an Investment Bond? wealthy people - growing investment through bonds or platforms

Also called life insurance bonds, investment bonds can be tax-efficient investment wrappers. If you’re looking for a way to grow your money over the medium to long term (think 5-10 years or more), then an investment bond might be right for you.

Investment bonds are considered single-premium life insurance policies (because most pay out a small amount of life insurance upon death). But they are really an investment product. If you’re specifically looking for life insurance, there may be other options that are better suited to your needs.


Are Investment Bonds different from Traditional Bonds?

It’s important to know that an offshore bond is not the same as a conventional bond, which provides a fixed-income return. When you invest in a traditional bond, you lend your money to—or become part owner of —a company or government entity for several years and receive interest payments.

An investment bond differs from a traditional bond because taxation is deferred due to zero or low tax levied against gains achieved by the underlying investments. However, you should be aware that when you take profits from an offshore bond they become taxable at the applicable rate in your country of residence.


How do Investment Bonds work?

Typically, you’ll buy an investment bond from a life insurance company or financial institution, which will invest your premium on your behalf for potential capital growth. Some investment bonds may require a minimum investment term and charges may vary depending on the type of bond you choose. Additionally, there’s usually a minimum investment amount, which is approximately £50,000.

When you invest in an investment bond, it is common to have a range of funds and other investment options available to choose from. You should take into account the different options before deciding which provider’s bond best suits your needs.

When you cash in an investment bond, the amount you get back depends on how well, or badly the investments have done. In the UK, you can withdraw up to 5% per year of your total amount invested without paying any immediate tax. This 5% per year allowance carries over if unused. However, it’s worth noting tax deferral doesn’t mean tax-free – the tax bill will eventually become due after 20 years or upon death.


Why should you invest in Life Insurance Bonds?

The premier benefit of investment bonds is their tax efficiency. But they aren’t as generously tax-efficient as ISAs, so people tend to turn to investment bonds once they’ve used up their ISA allowance.

One of the main benefits of offshore bonds is that they offer gross roll-up. This means you gain a higher return without being subject to immediate capital gains. Plus, unless you bring your assets back to the UK, you usually won’t be taxed as an overseas resident. However, it’s important to remember that your citizenship and residency status play a big role in selecting any long-term investment product.


The Pros and Cons of Investment Bonds

Every investment carries with it some level of risk. It is our job to ensure that clients understand just what the benefits and drawbacks are before adding an investment product to their portfolios.

In a nutshell, the advantages of an offshore bond are that:

  • Holders can defer paying taxes on their fund until it is more financially advantageous for them to access that money.
  • Profits are taxed as income instead of capital gains.
  • Bonds allow you to make a single withdrawal per year, often at 5%, which can be used as part of an income portfolio.
  • Bonds provide efficient estate planning options, as they do not incur estate taxes or inheritance taxes if gifted into trust.
  • Help with income and tax planning.

The disadvantages include:

  • Less tax efficient than pensions and ISAs – so probably only an option once you’ve maxed these allowances out.
  • You may be priced out by high investment thresholds.
  • Charges are potentially very high.
  • Mixed service levels from insurance companies.


Tell me more about Platforms…

So, investment platforms are like investment online supermarkets. You get to browse your options and pick and choose what you want to put in your basket.

An investment platform offers a centralised location for researching and investing in shares and investment funds. These online or app-based services allow you to keep track of all your investments, including trading history, all in one place.

Investment platforms fall into two main categories. Those that enable you to select specific investments. Then those that bundle investments together for you based on your investment objectives and risk tolerance.

The benefit of using an investment platform is the ability to tailor your investment choices to suit your needs. However, this also means that any investments made are on an ‘execution only’ basis. This makes you solely responsible for any losses incurred without any protection or recourse.

Types of investment opportunities available in platforms include:

  • Shares
  • Stocks
  • Investment funds
  • Exchange-traded funds (ETFs)
  • Investment trusts
  • Corporate bonds
  • Government bonds
  • Real Estate Investment Trusts (REITs)
  • Crowdfunding opportunities
  • Peer-to-peer lending
  • Commodities
  • Cryptocurrencies (depending on the platform)

Find out more about how expats can invest in platforms in our previous blog about it.


Why should I invest in Platforms?

When it comes to managing your finances, platforms can be a lifesaver. They allow you to choose and hold all types of investments in one convenient location, which means less paperwork and hassle for you. And the best part? You only need one password to access everything!


Are Investment Platforms suitable for expatriate investors?

expat investors

Investment platforms are definitely a great choice for expat investors, and as advisers, we highly recommend them for several reasons. However, it’s important to note that some offshore investment platforms still discriminate against expats living in certain countries. It’s crucial to find one that suits your investment style – whether you’re a DIY investor or prefer advice. Some platforms are geared towards experienced or institutional clients, while others are best for mainstream expat investors. There’s no one-size-fits solution, and choosing the right platform can make a pivotal difference to your financial outcomes.


How much do I have to pay to use Investment Platforms?

If you’re thinking of using an investment platform, you need to know that they all charge fees. But here’s the thing: these fees vary depending on the platform you use.

While UK and US platforms have become more affordable, the same can’t be said for some international investment platforms. A few of them are still stuck in the past with deliberately complex charging structures that are anything but transparent.

When it comes to fees, some platforms charge an annual fee for using their service. Others charge a one-off set-up cost plus an additional percentage of your investment’s profit, also known as a performance fee.

The bottom line is, you’ll need to check out the different types of fees that apply when signing up for each platform. And you’ll need a really awesome financial adviser who can make sure you’re paying no more than you need to. (We might know a guy…)


Are platform fees tax deductible in the UK?

Nice try. Whilst brokers’ fees are tax-deductible, platform fees aren’t. Capital gains rules are pretty clear that the expenditure must have been incurred wholly and exclusively for the acquisition or disposal of an asset. General account fees don’t satisfy those rules in the same way as actual dealing fees do.


Well, are there any tax advantages with Investment Platforms?

No, there are none. Zero. Zilch. However, this does not mean that platforms come out as the losers in the battle of investment bonds vs platforms…

The aim of the game in investing and wealth accumulation is to make the most money you possibly can. This doesn’t mean that beating the tax man is the only way to achieve this – or that tax efficiency is always top of the priority list.

Platforms may not come with the tax efficiency that investment bonds do, but their benefits include:

  • Greater choice of investments and therefore greater growth potential.
  • Convenience and simplicity – platforms allow you to manage all your investments in one place, making it easier to track and manage your portfolio.
  • Greater flexibility and portability between countries.
  • Cost efficiency – many platforms have low fees, which can save you money compared to traditional investment products – like investment bonds.


Are there any disadvantages to Investing in Platforms?

  • Varied fee structures – most platforms are brilliantly cost-effective, but you need to be careful.
  • Dependence on technology – if there’s a glitch or outage you may not be able to make immediate changes, but this tends to be very uncommon.
  • Security risks – naturally, there’s always a data security risk with online dealings, but platforms must adhere to strict data security procedures.
  • Regulatory risks: Some platforms may not be regulated by the same authorities or laws that govern traditional financial institutions. Choose wisely, and take financial advice if possible.


So, which Investment Product wins the title in Bonds vs Platforms?

All in all, what determines whether platforms or bonds are right for you is which product is going to achieve the biggest growth. Are platforms better than investment bonds?

Investment bonds can be a great option for wealthy investors, non-resident British expats, and even for care fees mitigation. However, they aren’t the best choice for everyone.

When it comes to investment bonds, it’s really all about each case on its merits. Under certain circumstances, they can be invaluable. But on other occasions, they can be complex. And some of their tax advantages may not be as helpful as they appear when you consider the possibility of an Income Tax charge one day.


Comparing Investment Bonds with Platforms

Italian riviera escape

Investment bonds have long been considered a “tax-efficient no-brainer” for investors seeking tax relief or pension planning. But, the truth is that they can be a costly way of saving on tax.

What’s the point of saving on tax with a so-called “tax efficient” investment bond, when the charging structure could leave you out of pocket when compared to a lower-cost investment route?

When you compare investment bonds against simply holding an investment on a platform and paying capital gains tax, many investors would be surprised to learn they’d be better off coughing up to the tax man. Especially when taking into account the flexibility and convenience of investment platforms.

As advisers within the OpesFidelio network, we’ve long known the truth about platforms vs bonds – having been privy to the OpesFidelio Bond v Platform Spreadsheet tool since 2018. This spreadsheet helps advisers compare the returns investors would get from investing directly on a platform versus investing in an investment/insurance bond. It takes into account taxes and surrender charges that become due upon withdrawal. This helps us as advisers guide you towards better investment decisions.


The takeaway in Bonds vs Platforms

In short, investment bonds can be a useful option, but it’s important to weigh up the pros and cons for your specific situation. If you’re not sure whether investment bonds or platforms are right for you, you’ll need expert financial planning advice to figure it out. Take advantage of our years of experience and exclusive adviser tools to discover if you would be better off investing in bonds or platforms today. Call us on +44 (0)121 232 8668 or email info@galileo-wealth.com.