income bonds and Annuities

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    What is the difference between an income bond and an annuity?

    I note that the capital value of annuities are fully disregarded and the income is taken into account.

    I have a claim regarding a standard life distribution income bond. This bond involves an initial investment which then pays out a regular income. The customer can cash in the capital value of the investment at any time.

    Is this treated the same as an annuity? If not why would it be treated differently? What is the key feature that makes it different?

    I’m waiting a call back from standard life to clear up if the bond is linked to life insurance or not

    chris harvey

    An annuity is a mechanism to convert a capital sum into an income. Once capital has been annuitised it ceases to be capital and becomes income. It’s a one way process so you can’t convert an annuity back into a lump sum and you can’t cash it in and get a capital sum back. Because you can’t revert it to capital, you can’t count it as capital. eg a £10,000 capital sum could be annuitised into an income for life of £700 per annum, if you did this and died in a couple of years time you would have had £1400 in income and the insurance company has made a tidy profit. However if you lived for 20 years you would have had £14,000 in income so the insurance company has lost money.
    Income bonds distribute the interest accrued in regular instalments. They are capital because they can be cashed in and the original capital sum returned to the investor.


    Brilliant, thanks for that very clear explination Chris

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