why go with guarenteed growth bonds and not a building society fixed year

merl1955

I am confused seen IFA and have been advised to put £70,000 split into Legal and general capital protection plus growth bond and prudential same product. we have used our cash ISA's for this year and put aside next years allowance. We have said we will risk are s/s ISA.
But hear is why I am confused these bonds are suppose to guarentee our capital and if we leave them in for min 5yrs (i understand it's med to long term) we will be guarenteed 10% @ 5yrs and 20% @ 10yrs. But I read about the "smoothing" and then it goes onto say it may in certain situations not return the full capital?
Now if we but our money into say a fixed term building society would I be getting a better return plus the building society/bank will be covered by the compensation cover.
So what is the benefit of the bonds?
We have been badly bitten by endownment scandal and our very adverse to risking our pension payout.

exil

It may not return the full capital IF YOU TAKE IT OUT BEFORE THE 5 YEARS. At least that's how these things normally work, you'll have to look at the small print or ask an IFA to do it.

I understand your concern - my ISAs lost thousands in value in late 2008 and now I'm in my 50s I'm looking for something more secure.

Why go for these rather than a fixed term building society account? On average, this sort of fund is likely to do better. But all that's guaranteed is the 10% and 20% as you mentioned. However it sounds to me that you may not be being correctly advised, if you want a GUARANTEED (say) 5% a year then a fixed rate bond sounds more ideal for you.

Actually I looked at the Legal And General website and the guaranteed capital protection products are no longer available. Now the stock market has recovered the industry is starting to withdraw products like this. And I can't find anything that looks like this at the Pru. They are becoming like hen's teeth!

baby_boomer

merl1955 wrote: »

But hear is why I am confused these bonds are suppose to guarentee our capital and if we leave them in for min 5yrs (i understand it's med to long term) we will be guarenteed 10% @ 5yrs and 20% @ 10yrs. But I read about the "smoothing" and then it goes onto say it may in certain situations not return the full capital?

The 5 & 10 year points are "windows of opportunity" for you to withdraw your money on exact dates with a guaranteed gain of slightly less than 2% pa even if the overall fund has not returned that much or even lost money.

Regarding with profits investment, the strength of the fund is crucial. Prudential is good. Don't know about L&G.

Risk free investment at the moment doesn't offer great returns so good luck. Given that inflation has just peaked at 2.9% a 10 year guaranteed return of 2% doesn't look great. But I appreciate that it is some comfort if you've been burnt before.

There are other ways of reducing risk. Drip feeding your money into the stock market over 6 years is one (while putting the rest into a series of 1/2/3/4/5 year bonds). This won't appeal to your IFA as he only gets the commission on money invested.

Rollinghome

The best rule is if you don't fully understand it then don't get involved. They usually involve high profits for the provider which is why they offer IFAs such high commission rates to sell them.

Would depend on your exact circumstances but you might be better off with a mixture or cash savings and equity and bond unit trusts or investment trusts which could be held within an ISA. You can easily pick those yourself and pay far less commission at somewhere like www.h-l.co.uk.

It will be one of the most expensive purchases of your life apart from your home so the best way is to invest in a couple of good books on the subject before you make any decision or part with your money. The only person who will genuinely care about your finances is yourself.


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exil

That doesn't sound at all right for the OP who sounds averse to losing any of their investment AT ALL - that rules out any equity-based investment that doesn't carry some sort of guarantee.

And picking and choosing your own bonds without IFA advice is not for anyone who is not something of an investment wizard - and it sounds like the OP is not (hope that's not unfair).

And no, I'm not an IFA!!!!!

Aegis

Rollinghome wrote: »

The best rule is if you don't fully understand it then don't get involved. They usually involve high profits for the provider which is why they offer IFAs such high commission rates to sell them. .

From what I've seen, most guaranteed equity bonds offer a lower commission rate than what's available on standard unit trusts and OEICs, so it's unlikely to be a purely commission-driven product selection. I'd expect a product like this to pay somewhere in the region of 3% with no trail, compared with an OEIC that could pay up to 5% with 0.5% trail.

It's more likely that the product was chosen because to risk averse people it looks like a no brainer at first glance: capital protection with some exposure to market upswings. Delving into it a bit more, some unfavourable terms might be spotted compared with direct investment into the markets, but the direct investments come with extra risk of losing money in absolute terms, and may therefore be inappropriate for the lower-risk investors.


OP: can you detail the exact terms of the products you've been offered? It might make it a little easier to understand, especially since some products will offer more favourable terms to IFAs than to standard retail customers.

merl1955

Exil does your comment mean that if they are still available that they are something to think about.
I have looked at the bonds that you invest in like the barclays wealth 6yr
where it is linked to the FSTE 100 and as long as the stock market goes up you will get at least 24% but could settle at 48%.
What is the difference say with that bond and the guaranted bond?
Your right we are terrified of losing this money, and we understand about making your money increase to cover inflation. but psychologically any drop in the actual lump sum scares the death out of us as this has got to last us from the age of 57- till infinity.
The product is capital growth protection plus growth bond by L&G it is on the L&G web site and the other is called PruFund but can't see anything on website but have the literature fromIFA.
I know we seem a bit thick but I have read so much and thought I understand and then I read something else and think that sounds good. So have become confused big style. We don't need to touch the money for 5 years as I am still working and hope to keep working for the next 5 years.

Aegis

merl1955 wrote: »

Exil does your comment mean that if they are still available that they are something to think about.
I have looked at the bonds that you invest in like the barclays wealth 6yr
where it is linked to the FSTE 100 and as long as the stock market goes up you will get at least 24% but could settle at 48%.
What is the difference say with that bond and the guaranted bond?
Your right we are terrified of losing this money, and we understand about making your money increase to cover inflation. but psychologically any drop in the actual lump sum scares the death out of us as this has got to last us from the age of 57- till infinity

Have you looked for quotes for annuities? If this has to last until death and can't have any capital risk, then it might be worth at least seeing what you can get for that. The rates are likely to be quite low because of your relatively young age, but it's certainly the most guaranteed way to use money for the rest of your life.

Investing will always carry a certain amount of risk. With the guaranteed equity bonds, the risk is that if the investment is linked to a market index and that market crashes shortly before maturity, you could end up losing real value (i.e. the actual purchasing power) because of inflation outpacing the guaranteed growth rate. These packaged products typically sacrifice some of the potential growth and the dividends that would be earned on the underlying investments in exchange for guarantees which are worse than investing into a deposit account for 5 years, however it can sometimes be the right sort of product for the extremely risk averse who still need some form of capital growth potential.

All in all, it's a bit of a minefield!

dunstonh

and our very adverse to risking our pension payout.

Which is probably why the IFA is recommending lower risk structured products .

Most IFAs are not at all keen on these and only use them at a last resort or when one comes along with particularly good terms.

Now if we but our money into say a fixed term building society would I be getting a better return plus the building society/bank will be covered by the compensation cover.
So what is the benefit of the bonds?

You can get structured products with better terms than fixed term deposits and investments get FSCS protection as well.

If you are planning to use income from your savings to live on then you really need to consider investments otherwise you are guaranteed to lose money on savings accounts. Inflation will erode your savings. So, 100k will be worth around £65k in 10 years time. The income you get will be lower in real terms as well.

So, whilst you are concerned about investment risk, you do also need to consider inflation risk and shortfall risk.

Rollinghome

exil wrote: »

That doesn't sound at all right for the OP who sounds averse to losing any of their investment AT ALL - that rules out any equity-based investment that doesn't carry some sort of guarantee.

And picking and choosing your own bonds without IFA advice is not for anyone who is not something of an investment wizard - and it sounds like the OP is not (hope that's not unfair).

And no, I'm not an IFA!!!!!

I think you need to read what I said. I did not suggest choosing bonds at all. I suggested, depending on his circumstances, he might be better off with a mixture of cash and equity/bond unit trusts and investment trusts. A bond unit trust is not a bond.

That doesn't require anyone to be an "investment wizard" and if you seriously expect an IFA to be an investment wizard you need to ask some questions. IFAs generally have minimal qualifications and know little about any investments other than the products that pay them commission. Many are former bank or insurance salesmen working on commission only and their primary skill is selling, not their financial knowledge. See www.moneyweek.com/personal-finance/need-unbiased-advice-youll-be-lucky.aspx .

Most banks and building societies pay commissioned salesmen to persuade customers to move from cash saving to those type of products. The reason they employ those salesmen is because those products make them more profit.

Due to poor standards, the FSA are forcing through changes in the way commission is paid and insisting on higher educational standards for IFAs by 2014. That may help but the industry is likely to still remain sales-orientated just as it is today.

The only real answer is to make the effort to do a little reading to obtain a basic understanding. You could also ask some questions on www.candidmoney.com where they seem to make an effort to be objective and uncomplicated. Their views are often quoted in the Observer newspaper for what it's worth.

mr_fishbulb

Rollinghome wrote: »

The only real answer is to make the effort to do a little reading to obtain a basic understanding. You could also ask some questions on www.candidmoney.com where they seem to make an effort to be objective and uncomplicated. Their views are often quoted in the Observer newspaper for what it's worth.

Hadn't seen their website before, but the guid to investing looks great for beginners - http://www.candidmoney.com/investment/default.aspx