Best Investment Bonds

Investing in bonds could make you a nice profit and they are often seen as a relatively safe way to invest, when compared to other investments.

Returns in bonds are currently up, as a result of rising interest rates positively impacting savings accounts, with savings accounts now looking attractive to investors. Fixed-rate savings account interest rates are as high as 7%.

Bond issuers are reacting by raising their own interest rates to entice investors away from using savings accounts and investing in bonds instead. 

Experts still view investment bonds as a clear winner over savings accounts, however, any type of investment still has its risks.

In this article, we will explore how investment bonds can benefit you, the pros and cons, and we offer our tips on the best investment bonds currently available across the UK.

Bonds	Score	Details
1. iShares GBP Ultrashort Bond ETF	★★★★★	Learn more
2. HM Treasury Gilt 6% Treasury Stock 2028	★★★★★	Learn more
3. RCi Bank 5-Year Fixed Rate Account	★★★★★	Learn more
4. Abrdn Ethical Corporate Bond Fund	★★★★★	Learn more
5. Amundi ETF Lyxor Core UK Government Bond ETF	★★★★★	Learn more
6. Sheffield Mutual Investment Bond	★★★★★	Learn more
7. NS&I UK Premium Bonds	★★★★★	Learn more
8. HSBC Onshore Investment Bond	★★★★★	Learn more

What is an investment bond?

An investment bond is essentially a loan issued by a company, which in this context is known as the bond issuer. Investors lend money to the company by purchasing its bonds. In exchange, they receive regular interest payments, often referred to as coupon payments.

Investment bonds are typically long-term commitments designed to increase the value of the invested money over several years. The longer the investment period, the greater the potential yield. However, while bonds can offer growth, the value of the investment isn't guaranteed.

To ensure the safety of your investment, look for the Financial Services Compensation Scheme (FSCS) logo. Bonds backed by the FSCS offer additional protection, making them a secure choice among the available fixed-rate options.

How do fixed-rate bonds work?

Investment bonds are financial instruments used by companies, or issuers, to raise capital. Investors buy these bonds and, in return, receive regular interest payments known as yields.

At the end of the bond's term, upon maturity, investors are repaid the principal—the original amount invested. Typically, the minimum investment for these bonds starts at around £5,000, although this can vary.

It's crucial to note that investment bonds are governed by stringent tax regulations. Understanding these limitations is essential before making a purchase.

For those interested in exploring this investment avenue, numerous online platforms allow you to open a brokerage account and search for high-yield, fixed-rate bonds. Available options often include bonds with maturity terms like one or two years.

Can I withdraw the money invested?

You can usually withdraw up to 5% each year of the original investment from an investment bond without incurring any tax liability.

It’s important not to equate investment bonds with savings accounts, which often allow flexible withdrawals. While the personal savings allowance means that interest up to £1,000 from a savings account is not taxable, the situation is different for bonds.

Bonds are essentially loans that you extend to a company, and the returns you receive from these bonds are taxable once they exceed the annual 5% withdrawal limit. This 5% limit is cumulative; it can be carried forward to future years, allowing for greater flexibility in managing withdrawals.

However, withdrawing more than this accumulated limit in a year triggers a 20% tax on the excess amount.

The best investment bonds

We've combed through the UK investment bond market and come up with our pick of the best eight options.

Investment Bond	Yield	Key Features
iShares GBP Ultrashort Bond ETF	5.43%	Perfect for short-term; total expense ratio: 0.09%; AA MSCI ESG rating
HM Treasury Gilt 6% Treasury Stock 2028	5.60%	High coupon payments; backed by the UK government
RCi Bank 5-Year Fixed Rate Account	4%	Fixed interest; annual or monthly coupon payments; no withdrawals
Abrdn Ethical Corporate Bond Fund	2.71%	Ethical investment; quarterly payments; ongoing charge 1.01%
Amundi ETF Lyxor Core UK Government Bond ETF	2.09%	Bi-annual coupon payments; very low ongoing charge 0.05%
Sheffield Mutual Investment Bond	3%	Guaranteed return after 5 years; no withdrawals allowed
NS&I UK Premium Bonds	4.40%	Prize draw instead of regular interest; prizes up to £1 million
HSBC Onshore Investment Bond	Variable	Flexible withdrawals; transparent costs; long-term investment

1. iShares GBP Ultrashort Bond ETF — Great for Rising Interest Rates

The iShares GBP Ultrashort Bond ETF, with net assets of £1,064,950,624 and 146 holdings, is an excellent choice for short-term investments due to its flexibility in buying and selling shares.

As an ETF, it's important to remember that you own shares in the fund rather than the actual bonds. Consequently, there is no guaranteed return of principal on a specific date, and the resale value of your shares may be less than your purchase price, depending on market conditions.

The current bond price to invest is £102.52, with a total expense ratio of 0.09%. The weighted average yield to maturity is a competitive 5.43%.

2. HM Treasury Gilt 6% Treasury Stock 2028 — Great for High Coupon Payments

The UK 6% Treasury Stock 2028 offers an attractive investment opportunity with its high coupon payments. This bond, featuring a 6% interest rate, delivers the highest coupon rate among all available treasury gilts.

While the UK government holds an AA credit rating—not the absolute top, but still highly reputable—you'll purchase these bonds at £107.53 each, enjoying a running yield of 5.6% for a robust return.

Compared to the US and German markets, UK government bonds typically provide higher yields.

3. RCi Bank 5-Year Fixed Rate Account — Great for Growth

The RCI Bank 5-Year Fixed Rate Account is a great investment if you're looking for a high yield and you don't mind locking away your funds for half a decade. 

You can earn 4% returns from investing in this bond, receiving your interest payments either monthly or annually. Therefore, when you deposit £1,000 into the RCI Bank 5-Year Fixed Rate Account, you could earn £1,216.65.

Your initial deposit must be at least £1,000. You can top up your deposit by any amount during the first 14 days of your investment. However, the maximum your deposit can reach is £1 million.

Be warned that you cannot withdraw any of your investment within the 5-year term limit.

4. Abrdn Ethical Corporate Bond Fund — Great for Ethical Investors

This fund, designed for ethically-minded investors, offers a modest yield of 2.71%. Given that the ongoing charge is relatively high at 0.64%, this yield might not be as competitive as other options in the market.

The fund requires a minimum investment of £100, and each bond can be purchased for £47.84. Currently, the fund's assets exceed £376 million, indicating a strong investor base and a commitment to ethical investment standards.

Abrdn has expanded its reach through recent fund mergers, aiming to enhance its offerings and appeal to investors interested in sustainable outcomes.

5. Amundi ETF Lyxor Core UK Government Bond ETF — Rock-Bottom Management Fee

The Amundi UK Government Bond UCITS ETF offers a modest yield of 2.09% with biannual coupon payments.

With a low ongoing charge of 0.05%, this fund represents a reliable investment in UK government securities, boasting an asset size of approximately £919.97 million as of March 2024.

Managed by Raphaël Dieterlen and Jean-Marc Guiot since its launch in 2016, the fund focuses predominantly on UK government bonds, providing stable returns and reduced risk for investors.

It's essential to understand that as an ETF holder, you do not directly own the underlying bonds. Consequently, there is no predetermined date when your principal will be returned in full. Instead, you have the flexibility to sell your shares in the ETF at any time, although there's a possibility of selling them for less than their purchase price. Notably, the ETF's three-year annualised returns currently stand at -8%, indicating that investors would have done better by simply keeping their money in a savings account or even under the mattress.

6. Sheffield Mutual Investment Bond — Great for Long-Term Investment Plans

Representative example — when you invest £1,000 into this bond, you will receive up to £1,400 after 5 years, although it could be as low as £1,050.

The Sheffield Mutual Investment Bond is a good choice for savers who want to invest over the long term. Offering a guaranteed benefit of at least 3% after 5 years, you can be safe in the knowledge that you definitely won't be losing money. Of course, such modest returns are very unlikely to outrun the inflation rate, so the real value of what you get back may be less than what you put in.

You can deposit an investment of as little as £1,000 to a maximum of £150,000.

Withdrawing your money before maturity is penalised with a fee that could mean you end up getting less back than what you put in.

7. NS&I UK Premium Bonds — Popular Choice for Bond Investment

NS&I UK Premium Bonds are investments with a difference. First implemented in 1956, Premium Bonds were designed to encourage people to save again following the end of the second world war. The minimum deposit is as little as £25 and as high as £50,000.

Premium Bonds are owned by around 23 million people in the UK. Instead of receiving small, regular coupon payments, investors are entered into a prize draw, potentially to win large sums of cash.

The odds of winning big in the Premium Bonds draw aren't particularly favourable. Although two individuals win a million pounds each month and nearly 1.5 million £25 prizes are awarded, these figures do not reflect the typical investor's experience.

For instance, if you and 99 friends each held £1,000 in Premium Bonds, more than half of you would likely win nothing over the course of a year. While this may seem confusing given the average return of 4.4%, it's important to understand how mean averages work. The presence of high-value prizes heavily skews the average upwards, making it a poor representation of most participants' actual outcomes.

Nevertheless, Premium Bonds could be an appealing option if you enjoy the thrill of checking monthly prize draws. Unlike the National Lottery, the money you invest in Premium Bonds is secure. You can withdraw it at any time without the risk of losing your initial deposit.

8. HSBC Onshore Investment Bond — Great for Large Investment Amounts

The HSBC Onshore Investment Bond offers unlimited deposit potential but requires a significant initial investment of £15,000. This bond is ideal for those looking to commit to a long-term investment while retaining access to their funds, with options for both regular and one-off withdrawals.

The investment grows seamlessly, and its clear, transparent terms ensure that there are no hidden fees to worry about.

The different types of UK investment bonds

First, decide if you want to make a short-term investment or a long-term investment. 

A short-term investment will allow you to access the initial amount invested sooner, for example after just 2 years. A long-term investment on the other hand may restrict access to your cash for as long as a decade.

Fixed bonds are generally categorised into two main types: corporate bonds and government bonds.

Corporate bonds

Investment-grade corporate bonds are issued by companies looking to raise capital. When you purchase these bonds, you are essentially lending money to a corporation. In return, you will receive periodic interest payments, known as coupon payments, until the bond reaches maturity. At that point, the principal amount you initially invested is returned to you.

The frequency of coupon payments can vary—typically they are paid annually, semi-annually, or quarterly, depending on the terms set by the issuing company. It is important to verify when these payments will be made.

The interest rate for these payments is fixed, hence why these bonds are considered fixed-interest assets. For instance, if a bond has a 5% annual coupon rate and you invest £1,000, you would receive £50 annually as interest until the bond matures.

Government bonds

Alternatively, government bonds (commonly referred to as gilts in the UK) involve lending money to the government rather than a private enterprise. Gilts are a popular choice among high-earning savers due to their tax efficiency and are often used to finance public projects and infrastructure.

These bonds are typically seen as less risky compared to corporate bonds because the risk of the government defaulting is generally lower than that of businesses, which can face bankruptcy more suddenly.

Like corporate bonds, gilts also pay regular coupon payments at a fixed interest rate. For example, a 5% coupon rate on a £10,000 investment in government bonds would yield £500 in annual interest.

Regardless of the type of bond you choose, it is crucial to check whether they are covered by the Financial Services Compensation Scheme (FSCS) to ensure your investment is protected.

The pros and cons of investment bonds

To gain a clear picture of the best fixed-rate bonds and the positives and negatives of this investment product, take a look at this section.

Check out our expert review to find you the best investment bonds, acquiring as much knowledge as possible before investing. 

Pros

✔️ Withdrawals — while some investment options completely restrict withdrawals, investment bonds provide flexibility, allowing you to access up to 5% of your initial investment annually. This amount can accumulate over time, enabling larger withdrawals when needed. However, withdrawing more than this allotted percentage will incur a 20% tax.

You can also withdraw more than this amount whenever you like, although a 20% tax rate is applicable.

✔️ Long-term investment — bonds are often chosen for their long-term benefits, such as planning for retirement or securing a financial foundation for your children. With a 10-year bond, for instance, you can enjoy steady coupon payments throughout the investment period.

✔️ Returns — Upon maturity, you will receive back the full amount initially invested in the bond. Unlike stocks, where your principal can decrease in value, the original investment in bonds is secured. Additionally, the fixed interest rate on the coupons provides predictable returns, with recent yields attracting significant interest from large asset management groups.

✔️ Less risk — Although the value of fixed-rate bonds and the interest they pay can vary, they are generally considered lower-risk compared to more volatile investments like stocks. This makes them a safer choice for investors seeking stability in their portfolio.

Cons

❌️ Tax — Taxes are applicable on amounts withdrawn beyond the 5% cumulative limit, and higher-rate taxpayers may face a 20% tax on these gains. The tax regulations for investment bonds are also more complex compared to ISAs.

❌️ Lack of control — When you invest in bonds, your money could be used for projects that you might not personally or ethically agree with. This is true for both corporate and government bonds. Investors have no control over how the bond issuers use the funds.

❌️ Fixed return — While receiving a fixed return ensures predictability, it also limits potential gains. Unlike other investment opportunities that might offer exponential growth, the return on investment bonds remains consistent, matching the initial agreed-upon rate.

❌️ Higher investment amount — Some of the most attractive fixed-rate bonds require a substantial initial investment, which can be prohibitive. Each bond comes with its own financial commitment, necessitating thorough market research to find the most suitable option. However, premium bonds typically demand a significant portion of your savings.

Investment bonds: The verdict

Investing in bonds is generally considered a lower-risk option compared to stocks and shares.

However, it's important to understand that when investing through bond ETFs, you're not holding the actual bonds directly. This means you do not receive a guaranteed return of your principal upon maturity as you would with individual bonds.

Additionally, while bond ETFs offer the potential for regular income through coupon payments, the principal value of your investment can fluctuate based on market conditions, meaning there is a real risk of losing money.

Moreover, bond returns can sometimes be modest, potentially underperforming stocks and failing to keep pace with inflation. This could impact the long-term growth of your investment.

If you're looking for competitive yields, a corporate bond might be suitable due to its growth potential. Alternatively, government gilts offer more stability and are often trusted by conservative investors.

Regardless of your choice, it's crucial to be aware of both the advantages and limitations associated with bond investments.

Related guides:

• Premium Bonds Vs ISA — What Is The Best Option In 2024?