Post Office Equity bond ~ shocked at the return value!

Squeeky20

Hi , Firstly apologies for the long post! Reading glasses will be required !

I'm flummoxed at opening a letter received form the Post Office notifying me of my sum due to be paid out on a Post Office Equity Bond taken out 5 years ago.

I invested a sum of £3000.00. I initially had no contact other than a letter eventually giving me brief account and information.

After 5 years of investment I received a letter asking me my bank details so the maturity value could be transferred over.

So I eagerly opened the letter ( no mention of the maturity value) and logged into my bank account.

I had such a shock when I saw the sum paid into the bank was £3006.22p!!!

5 years of investment for a £6.22 return!
I was under the impression and was advised at the time that the return would be a much higher yield! If I am correct this is what the bond basis was sold to me based on the information below:

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The Guaranteed Equity Bond is a Fixed Term deposit account that gives you the chance to benefit from a percentage of the growth potential linked to the performance of the FTSE 100 index, whilst your original deposit remains secure.


Details off the website -

How it works
Here’s how Post Office™ Guaranteed Equity Bonds work

Your money is not directly invested in the stock market, but is linked to a percentage of the performance of the FTSE 100 Index, adjusted by an averaging method. As a result of this you are not entitled to any dividends arising from shares within the index and these dividends are not reinvested.

If the market does well, so does the Bond
If the market performs poorly, you may earn no interest
But you'll never lose the original amount you invested

Your step by step guide to Guaranteed Equity Bonds
You choose the amount you wish to invest – from £500 and £1,000,000
You also choose the length of the investment, either three or five years
The Three Year Bond gives you 75% of any growth in the FTSE 100 Index, adjusted by an averaging method
The Five Year Bond gives you 110% of any growth in the FTSE 100 Index, adjusted by an averaging method
The Guaranteed Equity Bonds are a limited offer product, which means the closing date for investment in this issue is 4th April 2005 – or sooner if they become fully subscribed
The Post Office™ Guaranteed Equity Bond is a fixed term deposit account which is linked to a percentage of the performance of the FTSE 100 Index, adjusted by an averaging method
From the day your funds clear until the date the Bond opens, your investment will earn a 4.5% Gross* / AER† fixed rate (this interest is added onto the original amount of cash invested in your Guaranteed Equity Bond)
On 22nd April 2005 the first FTSE 100 Index reading is taken. This is Index Level 1
The second reading (or Index Level 2) is created by taking the average of several readings over the last months of your Bond’s investment period. With the Three Year Bond, we take an average of seven readings taken over the last six months of the investment. For the Five Year Bond, we take the average made of 13 readings taken over the last 12 months of the Bond's Fixed Term
The percentage of growth between Index Level 1 and Index Level 2 is used to calculate your Bond’s earnings. You will receive 75% or 110% of any growth depending on the term of your Bond
Even if the FTSE 100 Index falls over the period, you’ll still get back every penny of the amount you originally invested – plus the interest it earned during the offer period. Please bear in mind that its value could be eroded by the effects of inflation



How to tell if a Guaranteed Equity Bond from the Post Office™ is right for you
The Post Office™ Guaranteed Equity Bond won’t suit everyone. So, before you invest, we’ve pointed out a few things you should consider before applying.

Yes, it could be right for me because I:
want to share in any FTSE 100 growth over 3 or 5 years
am looking for stock market linked growth potential
want to know that my original investment is secure
have a minimum lump sum of £500 to invest
won’t need to touch my investment for 3 to 5 years (remember, you may need some spare cash for emergencies).


No, it probably isn’t right for me because I:
like to top up my savings regularly
want regular income from my money
may need to get to my money during the 3 or 5 year period
haven’t any spare cash for unexpected emergencies
want a guaranteed rate of return


What to expect
Have a look at the returns you could enjoy

The following tables are a guide only for the type of return you could receive at maturity with a Post Office™ Guaranteed Equity Bond


Three Year Guaranteed Equity Bond

Your initial investment Averaged increase in FTSE 100 Index over 3 years 75% participation Your initial investment plus gross interest*
£10,000 -25% 0% £10,000
£10,000 +5% 3.75% £10,375
£10,000 +20% 15% £11,500
£10,000 +50% 37.5% £13,750



Five Year Guaranteed Equity Bond
Your initial investment Averaged increase in FTSE 100 Index over 5 years 110% participation Your initial investment plus gross interest*
£10,000 -25% 0% £10,000
£10,000 +5% 5.5% £10,550
£10,000 +20% 22% £12,200
£10,000 +50% 55% £15,500


The above tables are intended as guides for reference purposes.
They are not representations of the exact returns you may receive and do not take into account deductions of income tax or the effect of inflation.


Here’s how we work out your returns

To calculate the growth, first we take the level of the FTSE 100 Index when the Bond opens on the 22nd April 2005. This is called Index Level 1.
Then we work out the average FTSE 100 Index level towards the end of the Bond period. We take the average from 7 readings over the last 6 months for the 3 Year Guaranteed Equity Bond, and an average from 13 readings over the last 12 months for the 5 Year Guaranteed Equity Bond. This is Index level 2.
The difference between the two index levels is the amount of growth achieved
Choose a Five Year Guaranteed Equity Bond and you’ll receive 110% of any growth
Pick a Three Year Bond and you’ll get 75% of any growth
Averaging will give you a different Index level 2 figure compared to an Index reading taken on a single Index reading day. One effect of averaging in a rising market is likely to be to constrain the find level of the Index used to calculate benefits.

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So, my question is:

Is £6.22 interest about right as a return or have I been duped !!!!!:mad:

xrjtg

Squeeky20 wrote: »

Is £6.22 interest about right as a return or have I been duped !!!!!:mad:

The index closed at 4864.9 on 25 April 2005, and for the last 12 months has been bouncing around between 4800 and 5600. So it looks low to me, but it's probably been calculated in accordance with the rules you signed up for.

GEBs have a bit of a reputation for being poor value.

dunstonh

I was under the impression and was advised at the time that the return would be a much higher yield!

How were you advised? The post office dont employ any advisers.

You bought a structured product with not very good terms that was linked to the performance of quite a poor performing index. The index fell during the credit crunch and recession but has since recovered a little but is back to where it was when you started. Therefore you dont benefit.

The product was never good quality, it was expensive (implicit charging which can look like there are no charges but when you factor in things like you not actually investing in the FTSE and therefore missing out around 3% a year dividends, you then realise the limitations or the cost of guarantee).

Martin used to promote the post office structured products here but after pressure from the regulars on the board he dropped all reference to structured products.

Is £6.22 interest about right as a return or have I been duped

Its about right for that product.

Squeeky20

Thank you for the advise. I was told by my accountant that it may be worth investing in.............hmmm!

Well at least I know I haven't been mislead.

Hindsight Eh , don't you just love it!:mad::eek:

Thanks anyway!

dunstonh

I was told by my accountant that it may be worth investing in.............hmmm!

Accountants are not allowed to give financial advice. Now you know why.

bigk

If it's any consolation to you (probably not!) I invested £10000 in a Capital Bond (commercial property) from Standard Life in 2000. As of today after 10yrs it is worth £9700. This was sold as a low risk investment by a financial advisor. Some investment,eh!? There are loads of stories like this due to the previous market colapse. It was worth £8000 at one stage in 2008 and so I am waiting for it to come back into positive equity. Not much help, I know but you are not alone in your disappointment.

dunstonh

this was sold as a low risk investment by a financial advisor.

That is correct. It is and still remains cautious.

Commercial property sector had around 14 years of continuous growth averaging over 10% a year in that period. It took a bit hit in the credit crunch and recession.

The mistake in your case, if there is one, is having 100% of your investments in just one sector. If the £10k was part of a wider portfolio then that is fine. Although it should have been rebalanced over the years if that was the case. However, that is something you do or employ someone to do for you. It didnt happen automatically

Mikeyorks

Squeeky20 wrote: »

Well at least I know I haven't been mislead.

Hindsight Eh , don't you just love it!

You will find that the return on the GEB is precisely £zero.

The £6.22 is the (gross) interest from the date you made the £3k deposit until your GEB actually started .....

Squeeky20 wrote:

From the day your funds clear until the date the Bond opens, your investment will earn a 4.5% Gross* / AER† fixed rate (this interest is added onto the original amount of cash invested in your Guaranteed Equity Bond)

Loughton_Monkey

Your bond is a good "Case Study" in what you are buying in any "Structured Product".

Here's how you could have done your own very simple Structured Product.

Firstly take your £10K, and put precisely £8,219.27 in a 5 year fixed rate bond paying 4%. Now take the other £1,780.73, and put it into a FTSE tracker fund (an ETF, or CFD, or whatever). In 5 year's time, your bond will yield exactly £10,000 (that's your 'guarantee'), and in the case I have just outlined, your FTSE investment would - as it happens - have yielded roughly no profit/loss. So you would have got £1,780.73 back, which actually represents (if my maths is correct) 3.33% per annum on the whole thing!

Now understand that the banks cannot do it this simply. Because where's the profit in it for them? The bond has virtually no profit for them, so they have to 'steal' it from your £1,780.73. OK, so now they've stolen £1,000, leaving you with just £780.73, which could not possibly 'do the business' simply being invested in FTSE.

So, quite simplistically put, they have to put it into some form of hedge fund, or other 'vehicle' that (to us laymen) could be loosely termed a 'bet'. If X,Y, and Z, happens, then wow! You'll get a good return. If it doesn't, then tough luck. Money's gone!

This is one reason why some of the initial documents are hard to get your head round [The minute you understand it's a 'bet', you can usually work out more or less how it is structured]. But if you think that's bad, look at some of the Asian products. They've been doing these for far longer than us, and have developed into the most ludicrous 'investments' I have ever seen. To get your growth, (and although I'm making this up, it's not exaggerated), you have to see (A) Gold prices go up at least 10% in the period, and (B) Toyota shares must rise by 50%, and (C) Oil prices must drop, but by no more than 6%, while the US$ must increase in value against the Yen.

Remember that the non-bond or "punt" element is going to be very tenuous. It has to be, because by the time it's gone round all the merchant bankers, brokers, and 'back room boys', it needs to pay 30% or 40% commission.

Remember, too, that because things are not quite so 'rosy' for bankers, they are now dreaming up far more exotic 'hedge funds' that can actually lose money (i.e. more than its initial cost!). You can always spot these because your £10,000 will not be fully guaranteed. Under certain circumstances, it will actually lose 50% of it's value! Even more commission for the men in suits.

So if you fancy one of these so-called products, I think you would get far better value by putting the correct amount in the bond, and then the rest should go into a handful of 'ambitious' funds, bought through a discount broker to minimise costs. This way you can actually feel part of the 'punt', and are unlikely to lose your shirt, and maybe you could double or treble it in a few years.

GingerG

Hey Squeeky 20

I'm also flummoxed at my Post Office Equity Bond return taken out 5 years ago, in September 2005.

I invested a sum of £1000. Same as you on contact and paperwork from the PO. After 5 years of investment I received a letter asking me my bank details so the maturity value could be transferred over and logged into my bank account, to find the sum paid into the bank was £1001.78p! Actually £2.22 interest but with 44p taken off for tax!!!

I am furious and having looked back at the PO paperwork, can now see that Mikeyorks assessment is correct: GEB is precisely £zero. The £6.22 (£2.22 in my case) is the (gross) interest from the date you made the deposit until your GEB actually started .....

That timescale for me was 18 days - £2.22 interest, quoted a 4.5% interest rate for this period. But then linked to the FTSE Index over a 5 year period which has obviously not performed - no figures from the PO to back this up, just a letter saying my bond was due to mature (no amount quoted!) and it would be deposited into my chosen account. No wonder the financial institutions are rich, too busy conning us all. :mad:

Mikeyorks

GingerG wrote: »

But then linked to the FTSE Index over a 5 year period which has obviously not performed -

But it did 'perform'. The FTSE 100 was above 6500 on occasions during 2007 ...... and that would have given you a good return. Unfortunately the terms for GEBs (unless you get the 'kick out' versions which give you more chances at being lucky) take no notice of what happens during the period - it's purely the start and finish (usually averaged) comparisons.

Which is why - as Loughton Monkey elaborated - these types of GEB are purely a punt