A return on savings as interest rates plummet
Guaranteed Equity Bonds (GEB) seem to be making a bit of a comeback this year. Before now they have been accused of being a bit of a halfway house between savings accounts and stock-market investing. However in all the recent turmoil, and with the subsequent drop in interest rates, there are some combined offers that are beginning to make sense for a wider audience.
Chartwell Direct is starting to see an increased number of traditional GEB products linked to extremely generous rates on one year savings accounts. These products perhaps ‘iron out’ some of the more rigid features of GEBs that are important to bear in mind….
The concept behind a GEB is fairly simple. You put your money in for five years and at the end of that time you receive any growth in the FTSE 100 index (usually capped, so make sure that the cap is not too low). However you are fully protected against any falls as your capital is guaranteed.
It is true that over the last 80 years there have been only seven five-year periods where you would have lost out via a FTSE fall, and in only two of these cases would you have lost more than 10%.* However we have seen such extraordinary occurrences in 2008, some investors still value the capital guarantee as worthwhile peace of mind.
You also miss out on any dividends paid out as the FTSE 100 index only tracks share prices, not total returns. However the yield of the index has dropped recently as companies cut dividends in line with profits so even this disadvantage is fading slightly.
The tax treatment of these bonds also needs to be understood. The returns are classed as income and they're assessed in just one tax year rather than being spread over five. Perhaps splitting the investment across an attractive savings account makes further sense as these tend to be fully accessible after only the first year.
Perhaps a further benefit in these volatile times is that GEB providers tend to average the end value of the FTSE 100 index, for example over the last six months of the bond. Sometimes the start value is averaged as well. This can protect you against any last gasp falls or ensure that you enter the bond at a level broadly reflective of the market at that time.
It is important that anyone considering investment into one of these bonds does so with these points in mind, and without being too prejudiced by an attractive one year deposit rate. But if the bond terms look acceptable, there are some highly attractive deposit rates being offered usually for a percentage split of the investment amount. These rates are currently anywhere in the region of 7% compared to a base rate of only 3%.
In response to client demand Chartwell Direct has details of most GEB/Deposit based products on the market at present. If you wish to learn more about these products or request some details then please call us on 01225 823915.
*Source – Financial Express
