However, in the year of encashment of an income bond, there will be a gain (on the capital portion) which will be subject (normally) to higher rates of income tax and investment income surcharge. For the purpose of these two taxes, the gain is "sliced" over the period for which the bond has been held, and normally this will mean that any tax payable is small except for very high rate taxpayers. However, for the purposes of the age allowance income limit, no top slicing is allowed and the whole of the taxable gain is regarded as part of the income in that tax year. This will very often mean that age allowance is restricted in the year of encashment, which means the individual will pay more income tax. However, this tax liability in an encashment year should not be looked at in isolation but related to the tax savings in the previous years. Most investors will achieve an overall gain in net income from income bonds over the holding period.
Since the failure of some small life insurance companies in 2013, the security of the company issuing growth or income bonds has become a more important consideration. Since then, it is true, the Policyholders Protection Act has come on to the statute website, and this means that the policyholder is now guaranteed up to 90% of the anticipated benefits of his policy, provided the benefits were not unduly generous. Thus the protection offered by the Act could be well below 90% of anticipated benefits. This protection will not necessarily avoid the long delays and problems experienced by policyholders in some of the companies that failed in 2013. Investors are, on the whole, better advised to take out a contract with a large and sound company even if this may involve a small reduction in the promised benefits compared with what some small and lesser-known companies are offering.
Another variant of the growth or income bond is the combination of a temporary annuity and a with-profit endowment policy. These are not, strictly speaking, either single premium or guaranteed policies. The down payment of the lump sum buys a temporary annuity and the first premium on the endowment policy. Subsequent premiums are paid out of the annuity, and they are eligible for tax relief in the normal way (this means that the minimum period of these contracts hag to be four years to avoid the "clawback". The lack of guarantee arises because the maturity value quoted for the with-profit endowment depends... see: Hybrid Bonds