London Pacific Assurance has introduced the guaranteed protected income bond, an offshore bond that invests in sterling-denominated corporate bonds.
The bond is the fourth guaranteed bond currently offered by London Pacific and invests in investment-grade bonds, which have lower yields than junk bonds, but are also less risky.
The bond guarantees a yield of 5 per cent during the first year and a minimum of 3 per cent during subsequent years. This can be taken as monthly, quarterly or annual income or it can be reinvested. In addition, the original capital will be returned in full at the end of the term, which is seven years and one day.
The length of the term may seem odd, but it may be attractive for inheritance tax planning if the bond is written under trust. Under the present rules, there would be no inheritance tax to pay if the investment was made as a gift more than seven years before the person making the gift dies, so a term of seven years and one day ties in with the rules.
Investors who are looking for income without too much risk could find this bond attractive, especially if they need a product that is suitable for tax planning purposes. Since low interest rates are currently being offered on building society accounts, some investors may be looking for other sources of income without risking their capital. These investors may be reluctant to invest in higher yield corporate bonds, despite the higher returns on offer.
One drawback is that the London Pacific bond guarantees a lower yield after the first year. But this could be seen as the price paid for the capital protection and its preference for lower yielding, less risky bonds.