Guaranteed Investment Bonds (GIBS)

moneylover

I need some help!

I am in the position that earned income plus interest on savings has probably pushed me, I think, into needing to pay some tax at 40% for 2006/7. I would like therefore to shelter some money from the tax man for the current year and beyond. I have already bought ISA and one NS&I product this year. In 3 years time, when I am 63, I expect to be retired or working part time and, either way, higher tax rate liability will be a distant memory.

First of all I hit on the idea that perhaps I could put some of my savings (around £20,000 that I wouldnt need access to ) into a 3 year fixed interest rate/bond account that didnt add interest to the account until maturity as opposed to annually. However having read the small print I think that the interest is neverthless accruing to the account and would still atract extra tax in years one and two. So, First Question... is this a correct assumption, please???

In addition the best (not very good) account I can currently find that pays interest on maturity is Yorkshire Bank (gross 6.37% /AER 6% ) or Halifax Guaranteed Reserve (gross /AER 6.1%). So, second question, it is AER, isn't it, that is the true measure of what these accounts pay- ie Halifax better than Yorkshire??? I did read all of a previous thread on AERs and think I got the gist.

So now I am considering a guaranteed investment bond (GIB)as issued by insurance companies. As I understand it, I can choose growth rather than income and, in my situation, I wouldnt be liable for any extra tax over the automatically deducted 20%. All themajor discount brokers that offer GIBS are quoting the same prices and enhanced rates and from the Chartwell website http://www.chartwell.co.uk/files/pdf/GIBs/2007/May/070503_Growth.pdf I can see that the rates havent increased since 3 May which is before the last bank rate increase So, third question, are the rates likely to rise again, in order to be competitive, if there is another bank rate rise in July???

GIB rates quote the total net% rate for the length of time invested. So, for example Cardiff Pinnacle is 15.14% net for 3 years and 18.93% gross. So last question, is the 15.14% the equivalent to an AER and therefore would I effectively be getting 5.05% per year???

If you have read this far I am very grateful! I have learned so much from this discussion board in the last 6 months and read virtually everything posted. I am so impressed by the amount of help that is available to not very financially astute people such as myself.

jonesMUFCforever

Before considering GIB's see what the stockmarket has done over the last 3 years.
It has grown considerably more than 15% so gets the majority of the profits??-- the company running the GIB!
The only good part is that most guarantee your capital at the end of a set period of time.

I would consider getting advice from an IFA.

dunstonh

Guaranteed Equity Bonds are mostly useless products designed to be sold by low skilled advisers or direct to unsuspecting consumers who wouldnt know a good deal from a bad one.

As a higher rate taxpayer, you could look to investment bonds (onshore/offshore) or even stick with unit trusts but use low yield funds (use the ISAs for the higher yield funds and the unwrapped funds for the lower yield). There are also zero yield investments available as well.

If you have been following the site as you say, you will know that there isnt a single regular (either adviser or investor) that believes that GEBs are a good product.

cheerfulcat

Not the same as a GEB, though. It's an insurance product and has given rise to the only example of levity I have ever seen in a HMRC document ( LINK ). To save anyone the extra bother of looking up the reference to Voltaire, his view of the Holy Roman Empire was that it was " neither Holy, nor Roman, nor an Empire "...

moneylover

Yes, it is GIBs not GEBs that I am posting about and I know from reading this discussion list that GEBs are not generally a good product.

Dunston has suggested that as a higher rate taxpayer, I could look to investment bonds (onshore/offshore) or even stick with unit trusts but use low yield funds (use the ISAs for the higher yield funds and the unwrapped funds for the lower yield). There are also zero yield investments .
Can anyone suggest a website where I can read up on these products and are they available from discount brokers? Isnt a GIB an onshore investment bond anyway?

I intend to use an IFA but the time isnt right at the moment for me for several reasons.

Can anyone comment on the first question I asked - here it is again:

First of all I hit on the idea that perhaps I could put some of my savings (around £20,000 that I wouldnt need access to ) into a 3 year fixed interest rate/bond account that didnt add interest to the account until maturity as opposed to annually. However having read the small print I think that the interest is neverthless accruing to the account and would still atract extra tax in years one and two. So, First Question... is this a correct assumption, please???

And any more views on GIBs will be welcomed!

I am sorry if this is muddly I cannot get the hang of multiple quoting from other posts - need to read the site instructions, sorry again.

dunstonh

The first GEBs were insurance tax wrappered. Its only been in recent times that they have moved to other tax wrappers. You can currently get them in life, ISA, unit trust and even pension wrappers. Generally, you would use the term GIB for Guaranteed income bonds.

The last G*B I did was a GIB using life tax wrapper and that was back in 1996. A little cracker with a 5 year term increasing at 1% a year starting at 6% net in year 1 and finishing at 10%. Compare that to the current offerings. You can see why I have gone 11 years without doing another one.

and are they available from discount brokers? ......
I intend to use an IFA but the time isnt right at the moment for me for several reasons.

discount brokers are IFAs and vice versa.

These products pay no trail commission and typically pay 3% initial commission. The commission cannot usually be rebated into the plan and has to be rebated after the cancellation period. I seem to recall that the HMRC have changed some rules in the last few months that can see that rebate treated as a gain. Although from memory, it applied on investments over a certain amount. I havent got my tax manual handy so cant check that right now.

Also, as a higher rate taxpayer you will pay higher rate tax on the gain if you are still a higher rate taxpayer on maturity. The life tax wrapper is only of benefit if you are going to cease being a higher rate taxpayer in the future.

Can anyone suggest a website where I can read up on these products and are they available from discount brokers?

Its not quick reading as you can utilise investment trusts and unit trusts giving you many thousands of options.

A good sitefor generic info though is http://www.incademy.com/pages/home.htm?ginPtrCode=10002