DEFINITION of Guaranteed Income Bond (GIB)

A guaranteed income bond (GIB) is an investment tool that provides income in the form of interest over a specified time period, usually between six months and ten years. These bonds are issued by life insurance companies in the United Kingdom and are generally considered a low-risk investment. You can typically choose how frequently you want to receive the interest payments associated with the bonds, with options running from one per month to once per year, with monthly and quarterly options as well.

BREAKING DOWN Guaranteed Income Bond (GIB)

Guaranteed income bonds provide investors with fixed periodic interest payments so the investor knows what to expect in terms of return on their investment. The initial capital investment is guaranteed to be safe under most circumstances and is returned at the end of the investment period. Guaranteed income bonds, like annuity contracts, can be used as part of a smart retirement portfolio, but investors just beginning to save for retirement should opt for riskier investments with a higher potential for return.

Investors in the U.K. may opt for a guaranteed income bond for certain tax advantages. Because the money investors put into guaranteed income bonds are already deemed to be taxed, the income earned in these bonds is often not taxed by the U.K. government, as long as the interest received falls below a certain threshold. Investors should not invest in guaranteed income bonds if they expect to be in a higher income tax threshold by the time they are receiving income from the bond. 

Other Features of Guaranteed Income Bonds

The minimum investment needed for a guaranteed income bond is £5,000 and the minimum investment period is six months, though investors sometimes purchase guaranteed income bonds with maturities several years long. Guaranteed Income Bonds also provide life insurance to purchasers, as many issuers will allow heirs to recoup at least all of the principal owed the purchaser of the bond.

Guaranteed Income Bonds, though very safe, are not without their risks. One risk to be aware of is inflation: If inflation rises quickly over the life of the bond, this will eat away at the value of the promised payments. Purchasers of guaranteed income bonds are also in danger of losing their investment if the issuing financial institution goes bankrupt. Also, holders of guaranteed income bonds run the risk that changes in tax law will affect the value of their investments.