50% return if FTSE rises, 0.5% if it doesn't...

jakeblade

I discovered the Capital Plus (Issue 5) on offer by Santander, which promises to pay a 50% return if the FTSE-100 stays the same (or increases), and a 0.5% return if the FTSE-100 falls.

This seemed to suit my need as I wanted:
- long/medium term investment;
- exposure to more risk than a simple fixed-rate bond;
- tax-free (this product is not subject to income tax but is subject to CGT, and you can also use S&S ISA allowance to reduce CGT liability);
- limited or no downside.

Note that for me this will sit within a broader portfolio of cash, bonds, short term savings, medium term share option schemes, cash ISAs, single equity shares (self select ISAs), and debt (mortgage) which is linked to BoE base rate. No I'm not rich - I just know what risks I'm happy to take, do my research, and then execute my plan so that I get a balance that I'm happy with.

At first I thought the product was too good to be true, since if the FTSE100 is same or higher at the end than the start, then there is a 50% return paid at the end of the 6 year period. That is almost 7% annual equivalent return (6.99%), tax-free (assuming no CGT liability). On the flip side, if the FTSE100 is lower at the end than at the start then the payout is 0.5%. Yes, this is a paltry amount, but this is the limited downside that I was looking for. So the product has a digital payout of either 50% or 0.5%.

So, if you think that the FTSE-100 will rise over the next 6 years but you are not massively bullish, then this product is worth considering.

The product isn't available online - instead you have to go into the branch in order for an adviser to tell you about the risks and benefits of the product.

And I'm glad I did go into branch: not only did it confirm that the product isn't a typo in terms of its potential high yield with very limited downside - but I was also offered a higher rate on my cash ISAs of 4.0% for the "normal" Santander cash ISA (currently 3.3%), accepting transfers in. I was going to take out the two-year fixed rate ISA at 4.0% whilst I was there, but took them up on the normal ISA at 4% instead.

Just thought I'd post this, in case anyone else out there also thought the product was too good to be true and couldn't be bothered to speak to anyone at Santander about it. The product is available until 10th May 2012, and the starting reference price for the FTSE100 is set soon after.

Now I sit back and wait for the sarchy emails about how you shouldn't take out investments at banks, or speak to advisers that are tied to the bank. Yep, I know all that already - which is why I said it seemed too good to be true.

Oh, and I'm a newbie - so be nice please .

dggar

Is this an official Santander press release????????????

opinions4u

Is it covered by the FSCS deposit protection scheme? Nope, didn't think so.

I could get a return of nearly 5% in a normal savings account or cash ISA. This is asking me to gamble that.

An extra 2% or so if I win. A reduction of 4% or so if I lose. Hardly a generous set of odds. And if the FTSE rockets I miss out compared to somebody who buys into a tracker ISA.

From their web site:

in the unlikely event that Santander UK plc was to collapse, you may lose some or all of your money.

I wouldn't touch this.

bigfreddiel

basically this is just a gamble - no one can predict where the ftse index will be one week ahead so trying to predict it 5 years ahead is impossible

my advice don't do it - go for a 5 yr frisa 4.5% - as a std rate taxpayer you would need 5.6% in a taxed account to better that.

if you'd done thison 4th and 6th april you could have tucked away £10k+

hope that helps

fj

jakeblade

bigfreddiel wrote: »

basically this is just a gamble - no one can predict where the ftse index will be one week ahead so trying to predict it 5 years ahead is impossible

my advice don't do it - go for a 5 yr frisa 4.5% - as a std rate taxpayer you would need 5.6% in a taxed account to better that.

if you'd done thison 4th and 6th april you could have tucked away £10k+

hope that helps

fj

Thanks fj.

I'm already all ISA'd out, and will be going forward. So I've been looking for the next best thing, which essentially led me down the route of investments without income tax liability.

jakeblade

opinions4u wrote: »

I could get a return of nearly 5% in a normal savings account or cash ISA. This is asking me to gamble that.

My ISA allowance always gets used, so this will sit above that. Please can you send me more details on the normal savings account that pays 5%, net of income tax?

jimjames

You've missed out some potential pitfalls. Apart from the obvious ones already about counterparty risk and not being covered by FSCS, it is likely that there are very strict terms on when you can get at your money without penalty. At least with a S&S ISA you can access it whenever you want.

Also you haven't mentioned that the return doesn't include dividends. So the 4% pa that is paid as dividends is not part of your return and potentially divs are an important part of your total return, in fact at 4% that would be nearly half of their maximum 50% return so the index itself would only need to rise 4% pa.

To me if you think the index will rise in 6 years then you might as well be in the market itself. If you don't then this product is pointless as there will be no return either.

I can understand why a cautious investor may consider this as the extreme of their portfolio but based on your first post you have single company shares? Why have something like that on the risk scale but not be prepared to be in the stock market itself - I'd be interested to understand the reasoning.

jakeblade

Thanks jimjames.

I'm not really a believer that FSCS will ever get called on - it's set at such a high level, I think it's just there to give some glimmer of confidence to get people saving and investing against. My view, I'm sure not necessarily shared by the majority! As for the specific cover for this product: it's protected up to £50k, and counterparty risk is with Santander UK. Will they be allowed to go under? Doubt it.

I have no need for the money in the next 6 years, so am not bothered about penalties for early closure or withdrawals.

I didn't understand your point about the 4% dividend... could you explain a little more??

Now I see it written down, I guess it does look odd to be prepared to take a view on FTSE100 but not take an outright position in a plain FTSE100 tracker, and to take single company share risk on the other hand. Well... my view on FTSE100 is that it is volatile: could go up, and could go down - but over a 6 year period I think it will end up higher than at the start. By how much, I don't know. That's the problem. If I thought I could bank on FTSE100 increasing 7%+/yr average over the next 6 years, sure I'd take out a FTSE100 tracker. I just can't see it at 8,600+ in 6 years time with any great level of confidence. So, essentially my view is that it will be somewhere in between. So I expect the payout from the product to beat where I think the FTSE100 will be...

Re: single share exposure - I'm taking a v e r y long term view that UK domestic housing stocks will recover, so it's spread accross that specific sector.

Chargem

Hi Jake,

The point about dividends was that if you invested in a FTSE100 tracker, the dividend yield is about 3% I believe, which would be roughly a 19.4% return if the FTSE100 stays the same over the 6 years, so would it would not have to get to the 8600 figure you quoted.

opinions4u

jakeblade wrote: »

My ISA allowance always gets used, so this will sit above that. Please can you send me more details on the normal savings account that pays 5%, net of income tax?

Emphasis was on the word around. Non-taxpayers can get pretty close to the. Cash ISA savers can get pretty close to that.

As for structured products like this, there are better available to the general public. I would expect the IFA population to have access to more.

http://www.moneysupermarket.com/savings/structured-products/

I'm not really a believer that FSCS will ever get called on - it's set at such a high level,

Well Bradford & Bingley savers would be an example of where the FSCS paid out a huge sum of money to protect savers. £14bn to protect the savings of ordinary people. Don't underestimate it.

I think it's just there to give some glimmer of confidence to get people saving and investing against. My view, I'm sure not necessarily shared by the majority! As for the specific cover for this product: it's protected up to £50k, and counterparty risk is with Santander UK. Will they be allowed to go under? Doubt it.

It's there to provide confidence in the banking system. It's needed. Anybody impacted by the Icelandic banks collapsing or the credit union going under will explain the benefits to you. As for counter party risk, I would feel much more comfortable if it was a genuine counter party as opposed to the organisation selling the product.

While I would agree that it's unlikely that Santander would be allowed to collapse I'd say it's more likely now than it was in 2008. They let Bradford & Bingley go, so it's not an impossible scenario.

I didn't understand your point about the 4% dividend... could you explain a little more??

Invest directly in to a FTSE tracker and you earn dividends. Save in Santander's mediocre plan and you miss out on this income. The compounding effect can be quie significant over time.

Now I see it written down, I guess it does look odd to be prepared to take a view on FTSE100 but not take an outright position in a plain FTSE100 tracker, and to take single company share risk on the other hand. Well... my view on FTSE100 is that it is volatile: could go up, and could go down - but over a 6 year period I think it will end up higher than at the start. By how much, I don't know. That's the problem. If I thought I could bank on FTSE100 increasing 7%+/yr average over the next 6 years, sure I'd take out a FTSE100 tracker. I just can't see it at 8,600+ in 6 years time with any great level of confidence. So, essentially my view is that it will be somewhere in between. So I expect the payout from the product to beat where I think the FTSE100 will be...

The point around dividend income means it wouldn't have to be anywhere near 8,600.

So my point remains. The saver is gambling his interest and loses it if the FTSE doesn't grow. The gain if the FTSE does grow is modest at best.

Sorry, I think the product is no more than mediocre.

oldvicar

opinions4u wrote: »

Is it covered by the FSCS deposit protection scheme? Nope, didn't think so.

From their web site:

in the unlikely event that Santander UK plc was to collapse, you may lose some or all of your money.

I wouldn't touch this.

I'm with U opinions.

The weasel wording in the disclaimer is typical, but even without suggesting there is any particular risk of Santander UK collapsing it would be sensibly written as:

in the [STRIKE]unlikely[/STRIKE] event that Santander UK plc was to collapse, you [STRIKE]may[/STRIKE] are likely to lose some or all of your money.

The risks referenced in the original and my version are both the same, and both true.