Protected FTSE Plan and Guaranteed Equity bonds - are they same thing?

mariegriffiths

matt_pimlico wrote: »

I have a letter from an IFA suggesting investment in a Barclays 5 year FTSE Plan. It offers 120% of the rise (if any) in the FTSE 100 index. However there is 3% commission payable.

I notice National Savings and Investments offer a very similar product called Guaranteed Equity Bond (GEB). It also offers 120% rise (if any) in the FTSE 100 Index. There is no commission payable.

Can anyone tell me whether they offer the same or have I missed something?

Torquil Clark can reduce that commission.
I have their leaflets.

mariegriffiths

Although after seeing James's post further down in the mail, I am tempted to throw them in the bin. So long as I can invest in Gilts as part of a Stocks and Shares ISA.

jamesd

I don't really recommend the gilts approach though. Better the one I describe in my most recent post, since it has a pretty small chance of ending up below where you started and is likely to deliver significantly more at the end of the term - or can just keep on going indefinitely.

mariegriffiths

jamesd wrote: »

I don't really recommend the gilts approach though. Better the one I describe in my most recent post, since it has a pretty small chance of ending up below where you started and is likely to deliver significantly more at the end of the term - or can just keep on going indefinitely.

Yes I can see how your second approach is likely to get you much more for very little extra risk, but I think th stock market is about to go down again and want lower risk at the risk of lower return.
I belive I have to take out a gilt of at least 5 years to meet ISA requirements.
I saw this on Selftrade available under a self select ISA for £25 I believe.

T813.C29 8% TREASURY STOCK 2013 115.55 27/03 27/09 8 6.92 5.15 6 182 0.132

So at the end of 5 years I would have gained 152.70% at 8% a yesr plus my money back (Assuming it is compounded).
I know inflation would bite into its true worth but this still seems good for something that is guarentted as long as the government doesn't go bankrupt.
I am a novice so please tell me where I have gone wrong.

cheerfulcat

I am a novice so please tell me where I have gone wrong.

Current yield is 6.92%. Gross redemption yield, which assumes that the gilt is held to maturity, is a not so interesting 5.15%.

The effect is that you get 6.92% p/a on your original investment but you are guaranteed a loss of capital if the gilts are held to maturity...

jamesd

The gilts aren't being sold at the issue price - they trade at a variable price and you need to look at the yields rather than the issue percentage to find out how much you will get. Cheerfulcat, surely you merely get the redemption yield, not loss of capital if held to maturity?

You may also want to investigate the use of regular saver accounts, since they can pay a higher rate than gilts, though with more work.

The corporate bond sector may rise in response to decreases in the value of the main market - it'll probably rise if interest rates fall to help stimulate the economy. Commercial property may fall a bit but should be pretty stable for several years. Using these two instead of gilts makes it easy to get the money out in less than five years without penalty.

Please don't use a plain FTSE100 tracker. Better a mixture of several different fund types, or at least the full FTSE instead of the worse-performing biggest 100.

Here are some example funds from various sectors, corporate bonds, commercial property and global growth fund of fund. The h-l links compare them to the FTSE All-Share index so you can compare their movements to the general market - worth noting how the first two don't respond much to FTSE changes, while the third shows a magnified effect.

• New Star Property (h-l) from Property all regions BI - real property uk, small REIT component
• Baillie Gifford High Yield Bond (h-l) from fixed interest - UK junk bonds
• Jupiter Fund of Inv Trusts (h-l) from global growth

You will need to select somewhere to reinvest the income, and FTSE isn't the place to do that if you want guarantees, so you'll need to pick a corporate bond or commercial property fund for this purpose, since new gilt buys won't meet the ISA minimum holding time requirement.

cheerfulcat

Cheerfulcat, surely you merely get the redemption yield, not loss of capital if held to maturity?

If you buy at a premium, as in this case, a capital loss is guaranteed. The effect of this is included when calculating the gross redemption yield.

mariegriffiths

So I will only get the 5.15% yield and I cant reinvest in the same gilt with the income. I would have to expose myself to normal stocks and shares, increasing risk. I'm very unconvinced at investing in commercial property, I see many empty office blocks at the moment before the likely increase in interest rates. I might just go with the Abbey Guarenteed ISA after all.

jamesd

You'd use corporate bonds if you're unconvinced about commercial property and want to avoid stocks and shares. Something like New Star Fixed Interest (h-l) could be suitable if you wanted something more predictable than the Baillie Gifford High Yield Bond.

The 5.15% part is what it takes for the gilt to return 100% of your initial investment at the end. That's the only job the guilts are supposed to do; they aren't supposed to provide any of the growth.

However, it sounds as though you aren't comfortable with this. Since you being able to sleep at night without worrying is a factor, I suggest that you choose the option you're more comfortable with. It's not the best financial choice but it probably is the one that will make you happier overall.

cheerfulcat

jamesd wrote: »

The 5.15% part is what it takes for the gilt to return 100% of your initial investment at the end. That's the only job the guilts are supposed to do; they aren't supposed to provide any of the growth.

The job the gilts are supposed to do in the first instance is raise money for the Chancellor. The job they do in an investor's portfolio - if bought on the open market - is provide income;the index linked ones also provide a certain amount of capital security against inflation. It was once possible to make a capital gain on gilts as they sometimes traded at a discount but this has not been the case in recent years, thanks to McCavity's machinations.

When gilts are issued, they come with a fixed rate of interest - the " coupon ". This is based on the face value, which is £100. So the particular gilt that mariegriffiths is interested in pays a coupon of £8 per £100 nominal of stock. The stock currently trades at £115.55 - so you are paying £115.55 for every £8/year of income. This gives the running yield of 6.92%. At maturity you get £100 back for every £115.55 - that's the loss of capital.

mariegriffiths wrote:

So I will only get the 5.15% yield and I cant reinvest in the same gilt with the income. I would have to expose myself to normal stocks and shares, increasing risk. I'm very unconvinced at investing in commercial property, I see many empty office blocks at the moment before the likely increase in interest rates. I might just go with the Abbey Guarenteed ISA after all.

You can re-invest the income but the price may not be the same; in any case once they have less than five years to run you can't buy them in a S&S ISA ( I'm not even sure that you can continue to hold them in an ISA at that point ). I'm not saying " don't buy gilts ", just suggesting that you understand how they work before buying. Regarding the Abbey product, I would still say give it a miss - it's rubbish.