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Guaranteed Investment Bonds?

OurKev
OurKev Posts: 762 Forumite
in Savings & investments
Hello folks,

I'm looking for a bit of advice please.

My friend invested in a Prudential 5 year bond, investing in the stock market, with a guarantee that at the end of the period she would get at least her money back (achieved by taking an additional 0.6% p.a. charge).

Maturity is early June and the return is looking pretty good.

She would like to take on a similar investment, but Prudential appear to only be offering a 10-year guarantee with an additional 0.75% charge.

Would anyone recommend an alternative bond/provider (she is keen on a 5-year timeframe with the guarantee plus chance of a good return)?

Thanks for your help.
«1

Comments

  • dunstonh
    dunstonh Posts: 121,405 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Guarantees are expensive at the moment and there has been a tightening up on the use of the word guaranteed. This typically means that guaranteed returns are frequently not worth it.

    You friend has just had 5 years in it and now wants another 5. That is 10 years. However many more 5 year segments is the money going to be there for? It could be that the requirement for guarantee is creating greater risk than not having a guarantee (replacing investment risk with shortfall risk and inflation risk)
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jimjames
    jimjames Posts: 19,283 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    It would be worth your friend thinking about why they want this bond rather than just a direct stock market investment. Over the last 5 years we have had one of the biggest stock market crashes of recent times yet the UK market is now back at the same level as before and others are well above. That's purely on the capital value, in addition you'd have received dividend payments of around 3-4% per year.

    With direct investment you also don't have any tie in and can get your money whenever you want. Definitely worth thinking about other options that may be better value.
    Remember the saying: if it looks too good to be true it almost certainly is.
  • OurKev
    OurKev Posts: 762 Forumite
    jimjames wrote: »
    It would be worth your friend thinking about why they want this bond rather than just a direct stock market investment. Over the last 5 years we have had one of the biggest stock market crashes of recent times yet the UK market is now back at the same level as before and others are well above. That's purely on the capital value, in addition you'd have received dividend payments of around 3-4% per year.

    With direct investment you also don't have any tie in and can get your money whenever you want. Definitely worth thinking about other options that may be better value.

    That's my approach (building up my S&S ISA), but the thought of losing money is a bigger concern to her than maximising return.
  • planteria
    planteria Posts: 5,322 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    which is why people invest in Structured Products, and Bonds with guarantees. i tend towards taking the risk on board, but if the guarantees would provide piece of mind then fair enough.

    if there is a lot of money involved, then the organisation providing the guarantee is important.
  • jimjames
    jimjames Posts: 19,283 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    OurKev wrote: »
    That's my approach (building up my S&S ISA), but the thought of losing money is a bigger concern to her than maximising return.

    There have been some good posts in here in the past about building your own guaranteed bond by splitting part into cash and the remainder into shares. Gives the same protection but at lower cost. I'll try to find a link
    Remember the saying: if it looks too good to be true it almost certainly is.
  • dunstonh
    dunstonh Posts: 121,405 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    planteria wrote: »
    which is why people invest in Structured Products, and Bonds with guarantees. i tend towards taking the risk on board, but if the guarantees would provide piece of mind then fair enough.

    if there is a lot of money involved, then the organisation providing the guarantee is important.

    SCARPs are not allowed to use the word guaranteed now unless deposit backed. This was after the FSCS found out that they were not protected by the FSCS. SCARPs have moved up the risk scale post credit crunch.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • masonic
    masonic Posts: 29,814 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    OurKev wrote: »
    That's my approach (building up my S&S ISA), but the thought of losing money is a bigger concern to her than maximising return.
    You should point out to her that over 5 years an annual 0.6% fee and 3% inflation adds up to a loss of almost 20% in real terms, so the "guarantee" offered isn't that great.
  • OurKev
    OurKev Posts: 762 Forumite
    masonic wrote: »
    You should point out to her that over 5 years an annual 0.6% fee and 3% inflation adds up to a loss of almost 20% in real terms, so the "guarantee" offered isn't that great.

    Already done that...
  • SammenForLivet2
    SammenForLivet2 Posts: 583 Forumite
    You're friend may want to have a quick glance here:
    http://www.cavendishonline.co.uk/investments/other-products/guaranteed-bonds/
    There is a £35 once-off fee, but no annual fee, if that helps - note: There are a lot of products to choose from, and not all protect the initial capital.

    Also, Castle Trust have some five year bonds, that are 'capital guaranteed' by the FSCS, but their returns are based on the Halifax House Prices Index.

    Hope this helps.
    Thank you all for helping me make my day by saving money!
  • OurKev
    OurKev Posts: 762 Forumite
    Thanks to all for your advice and help, much appreciated.

    Cheers

    Kev
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