What Is a Guaranteed Income Bond (GIB)?

A guaranteed income bond (GIB), sold by life insurance firms, is an investment popular in the U.K. that provides income in the form of interest over a specified time period, usually between six months and ten years.

Key Takeaways

  • A guaranteed income bond (GIB), sold by life insurance firms, is an investment popular in the U.K. that provides income in the form of interest over a specified time period, usually between six months and ten years.
  • Guaranteed income bonds are generally considered a low-risk investment and buyers can choose how often they want to receive the interest payments, with options from monthly to annually.
  • The minimum investment needed for a guaranteed income bond is £5,000 and the minimum investment period is six months.

Understanding Guaranteed Income Bond (GIB)

Guaranteed income bonds provide investors with fixed periodic interest payments, so the investor knows what to expect in terms of a return on the investment. The initial capital investment is guaranteed to be safe under most circumstances and is returned at the end of the investment period.

GIBs are generally considered a low-risk investment and buyers can choose how often they want to receive the interest payments, with options from monthly to annually. Guaranteed income bonds can be used as part of a retirement portfolio, but younger investors are advised to opt for riskier investments with a higher potential for return. As of early 2020, returns on guaranteed income bonds were historically low, with three-year bonds offering rates slightly under 2%.

Investors in the U.K. may opt for a guaranteed income bond because of certain tax advantages. The money investors put into guaranteed income bonds is already deemed to be taxed, and the income earned is generally not taxed as long as the amount paid falls below a certain threshold. However, taxes in Great Britain are complicated, so in some cases additional taxes may be required when the guaranteed income bond reaches maturity.

Inflation poses a risk to the investor in guaranteed income bonds.

Features of Guaranteed Income Bonds

The minimum investment needed for a guaranteed income bond is £5,000 (which is about $6,700 given the GBP/USD rate as of Dec 5, 2020) and the minimum investment period is six months. Many investors purchase guaranteed income bonds with maturities several years long. Other features include:

  • Guaranteed income bonds also provide a form of life insurance to purchasers, as many issuers allow heirs to recoup at least the principal owed to the purchaser of the bond.
  • GIBs tend to gain in popularity at times when the stock markets are in decline. They are havens for lump-sum investments, with the guarantee of getting that lump sum back.
  • Although they are very safe investments, such bonds are not without risks with inflation being a major one. If inflation rises quickly over the life of the bond, that will effectively reduce the value of the promised payments.
  • There also is the risk that the issuing financial institution will go bankrupt. However, under British bankruptcy rules guaranteed income bonds issued by life insurance firms have greater protections than other types of bonds, such as those issued by banks.
  • Finally, holders of guaranteed income bonds run the risk that changes in tax law will affect the value of their investments.