Added interest that cannot be taken away

I spent many years in the UK and was used to traditional 'with profits' investment policies, which always paid good interest, compared to bank deposits. As I now live in Malta, can I invest a lump sum into such a 'with profits' bond or must you reside in the UK? What rates of interest are such bonds paying and which insurance companies offer the best rates?

The 'with profits' bond has always been a very popular form of investing in the UK, the reasons being that they are regarded as very low-risk and returns have far outperformed similar low risk investments over five year periods or more.

'With profits' bond providers include many of the top and financially sound insurance companies such as Sun Life, Scottish Widows and Friends Provident. This is an important fact as I always recommend companies that have a very good free asset ratio and a long history of strong performance.

The good news is that 'with profits' bond are also available to international investors, not just those resident in the UK. Most of the leading UK insurance companies also have registered offices in the Channel Islands and Isle of Man.

The difference between investing in a UK bond or an offshore bond is effectively the tax efficiency of the latter. If you have a UK bond then the interest generated is taxed automatically and is reflected in the level of interest received. Any tax is not reclaimable, even if you are non-UK resident.

On the other hand, the offshore 'with profits' bond grows free of any income tax or capital gains tax within the fund. This is because they are deemed life insurance policies and are not taxable at source. You must however be aware that any income or capital gain may be later subject to tax, depending on your individual tax status.

'With profits' bonds pay two elements of interest or bonus. Even in times of low interest rates of today, reversionary bonuses are currently in the region of 4.5-5%. The interest is added to the capital sum invested on a daily basis so your investment is growing not annually, but daily. One very important factor regarding the reversionary bonus is that once added, it cannot be taken away. You therefore see a steady increase in the value of your fund.

The second element of 'bonus' is the terminal bonus. Normally this is added on at the end of the bond's life, i.e. when you decide to encash it or when the policyholder dies. This second bonus can make a substantial difference to the final payout.

Some companies also offer a first year guaranteed interest. Friends Provident in Guernsey for example offers a first year guaranteed bonus of 7% on an investment of £15,000. The first year guarantee increases with the higher the initial investment, up to 8.5% for larger investments.

You can only invest into a 'with profits' bond, having first received independent financial advice. You must therefore contact a financial adviser, licensed to advise in offshore investments to take advantage of such an opportunity.

Please address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively he can be contacted on 2131-1121/ 9984-2614 (office hours).

Past performance is no guide to the future and except where amounts are guaranteed the price of your investments (and the currency in which it is denominated) may fall as well as rise. Malta exchange control regulations must be observed. Your personal tax situation will depend upon residence, always consult a professional adviser. This article does not intend to give investment advice and the contents therein should not be construed as such. Readers are encouraged to seek professional advice regarding their personal financial situation.