Distribution Bonds: A High-Risk, High-Reward Investment Option

Strategic Insights -

Investors seeking a high income from distribution bonds must be cautious, warns the David M Aaron Partnership, as these single-premium investment bonds distribute dividends but come with a risk to capital. Millions of pounds are being poured into such bonds, mainly by income-seeking investors. Distribution bonds invest in a mixture of shares, gilts, and property, but even the most cautiously managed bonds carry a risk to capital and early-surrender penalties.

Key Takeaways:

  • Distribution bonds are single-premium investment bonds that distribute dividends as income, primarily benefiting basic rate taxpayers.
  • The bonds aim to provide some capital growth but come with a risk to capital, varying depending on the investment mix.
  • The David M Aaron Partnership has surveyed several distribution bonds, including the Hill Samuel Property Income Bond (5.6% net yield), Legal & General's Commercial Property Bond (6.1% yield), Axa Equity & Law Distribution Bond (5% yield), and the Sun Life Bond (4.2% yield).
  • For investors prepared to take slightly more risk, Aaron recommends Allied Dunbar's bond, the Skandia Distribution Fund, and the M&G Managed Fund.
  • The Scottish Provident Prolific Managed bond, yielding 8%, is recommended for those prepared to take a higher risk for greater capital growth.
  • Aaron has also surveyed with-profit bonds from Prudential, Royal Life, Friends Provident, and NPI, which rely on regular bonuses for investment returns.

Statistics:

  • 5.6% net yield for Hill Samuel Property Income Bond
  • 6.1% yield for Legal & General's Commercial Property Bond
  • 5% yield for Axa Equity & Law Distribution Bond
  • 4.2% yield for the Sun Life Bond
  • 8% yield for the Scottish Provident Prolific Managed bond
  • Annual bonuses for with-profit bonds are running at between 6.26% and 8%

Sources:

  • The David M Aaron Partnership
  • Hill Samuel Property Income Bond
  • Legal & General's Commercial Property Bond
  • Axa Equity & Law Distribution Bond
  • Sun Life Bond
  • Allied Dunbar's bond
  • Skandia Distribution Fund
  • M&G Managed Fund
  • Scottish Provident Prolific Managed bond
  • Prudential
  • Royal Life
  • Friends Provident
  • NPI
  • CU
  • GA