Distribution Bonds

A Distribution Bond is a single premium investment that aims to provide capital growth with a rising income over the medium to long-term. They are similar to With Profits Bonds inasmuch as they both use an underlying fund in equities, property and fixed interest investments to provide their returns, but they involve a slightly higher level of risk.

The underlying investment fund receives income and interest payments on the holdings that are kept separately. This is then distributed to policyholders at regular intervals, usually twice a year but sometimes quarterly. Unlike some investments, units do not need to be encashed in order to provide the regular withdrawals since these are made from the pool of income and interest received, and not from the fund itself. The most common withdrawal method is to take the accrued distributions as and when they are payable. This natural distribution should increase over time as the fund benefits from underlying capital appreciation.

An additional option is to take withdrawals of a specified percentage of the intitial investment on a monthly, quarterly, half-yearly or annual basis. By selecting one of these options, the natural distribution will be re-invested in the fund and units will be encashed in order to provide the selected level and frequency of withdrawals. There is a risk that the value of the fund may be eroded if the withdrawal rate is set higher than the natural distributions, especially in the early years. Currently a level of withdrawal of 5% is considered acceptable since any possible early year erosion is likely to be offset by the potential for underlying growth in the assets held in the fund.

Investment Warning:
Past performance is not necessarily a guide to the future and the value of units, and the income provided from them, can go down as well as up. You are not guaranteed to get back your original investment at any time.