Typical Charges on Investment Bonds

Bid/Offer spread

The bid/offer spread occurs when units are bought at the offer price and, when they are encashed, they are sold at the bid price. The spread is the difference between the offer price and bid price. This is usually 5%. For example, if an investment is £10,000 and the Investment Bond has a bid/offer spread of 5%, then the investment as of day 1 is £9,500.

Establishment charge

These charges are usually set up for a set period of the Investment Bond’s life and the amount and the length of time they are applied will vary from company to company. For example, an Investment Bond may carry an establishment charge of 1% of the fund’s value over the first 3 years.

Annual management charge

This charge is levied for the life of the Investment Bond. It can range from anywhere between 0.75% to 1.5% per annum of the Investment Bond value. Usually it is taken monthly. For example, a life company that levies a 1% annual management charge on its Investment Bond will usually charge 1/12th of 1% per month of the fund value.

Early exit penalties 

These feature on virtually all Investment Bonds. They usually last for the first 5 years of the Investment Bond’s life, gradually reducing to zero. For example, typical exit penalties will be 5%, 4%, 3%, 2% and 1% in years 1 to 5 respectively.

Allocation rates

These are not usually seen as charges as allocation rates normally enhance investment amounts before buying units. However, a few life companies will offer allocation rates under 100% to small investment sizes and/or for investors over certain ages. For example, on an investment amount of £10,000, a life company may offer an allocation rate of 97.5% if the investor is over the age of 85. In effect, the investor is incurring a charge of 2.5% as the £10,000 will only buy £9,750 worth of units.