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Guaranteed Equity Bonds

These are typically fixed term accounts offered by a bank or building society that allows the saver to participate in a Stock Index increase over the life of the investment without suffering a loss of your capital should the Index falls.

At first sight the combination of a capital guarantee with participation in stockmarket rises seems extremely attractive particularly for the small saver looking for a potentially higher return than they would get from a fixed term account.

Before investing it might be advisable to consider the following:

  • The meaning of the word 'Guarantee'. For example, in their terms Leeds Building Society make it clear that there is no Guarantee in the event that they should fail.

  • Life of a Bond. Typically from around 4 to 6 years. Unlike a direct investment in a Stock Market there is no freedom to cash in your investment early , so as to realise your gain if you think the Market will fall

  • Minimum return guaranteed. Leeds are presently offering a minimum of 4% over 5 years while Nationwide offer 12% over 6 years

  • Maximum return. This can be calculated in a number of ways:

    1. Using the index value at a particular date

    2. Averaging the index over a period of months or even a year. In a rising market over the last year this reduces the return for that year but may smooth out a short term fall in the Index at the end date

    3. Applying a ratchet that locks in any rise in the market, even if the index falls thereafter

  • Minimum Investment - from 500 up (Britannia)

  • The Index to be tracked. Most commonly this will be the FTSE 100 Index, but others such as the S&P 500 or Eurostoxx may also be used. More/different indices are thought to spread risk

  • Subject to any protection offered by the Financial Services Compensation Scheme (FSCS) your capital may be at risk;

    1. If the Bank or Building Society were to fail

    2. If a Third Party contracted with your Bank or Building Society were to fail.

  • Tax. Unlike an investment directly in the Market, gains on a Bond may be subject to Income Tax - a significant difference for higher rate taxpayers.

  • Dividends. Unlike an investment directly in shares, or in ETFs etc, you will not receive any dividends from the companies included in the Index

Below are a selection of providers of Guaranteed Equity Bonds (or Guaranteed Capital Bonds...) among banks, building societies, insurers etc:

  • Bank of Ireland

  • Birmingham Midshires Building Society

  • Britannia Building Society

  • Legal & General

  • Leeds Building Society

  • Nationwide

  • Natwest Bank

  • National Savings

  • Skipton Building Society

A logical alternative to such guaranteed equity bonds might be to hold an ETF or Index Tracker Unit Trust with the intention of selling if the price should ever fall back to your purchase price.

Whilst there would be no explicit Minimum Guarantee you could hope to gain a comparable or better return through dividends.



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