Savings

ROSSY

Hi I have been offered a stocks and shares isa for fixed term 6yrs if the ftse100 is 1 point higher than now i get 34% interest, if not I only get 2.5% interest , do you think this is a good deal

Kendall80

5.67% per annum?


Top current accounts are 'at present' paying 5% gross so whilst better its not really a great deal more (roughly 900 total). The risk you are taking is that if you end up getting 2.5% (assuming pa) and inflation has in the meantime gone up to 3%. Then that money would effectively be worth less than it was at the start of the venture. Your call but with that info and those assumptions I'd probably say no.


Of course if that's 2.5% total over the 6 years (not pa) then it'd be a definite no.

ROSSY

The 2.5% is in total after 6 years the gamble is that the FTSE100 will be higher the 6400 in 2020 cheers

jimjames

Buying a FTSE tracker means you are likely to get 3.5% pa income for the next 6 years plus any growth in the capital. Of course it may drop but you'll still get 3.5% income in the meantime.

Also means you can get your money at any time rather than having to wait 6 years for it. What happens if you need your money at 5 1/2 years?

badger09

ROSSY wrote: »

Hi I have been offered a stocks and shares isa for fixed term 6yrs if the ftse100 is 1 point higher than now i get 34% interest, if not I only get 2.5% interest , do you think this is a good deal

No, I don't

C_Mababejive

If they are offering the deal,whos favour do you think it will be weighted toward?

Archi_Bald

Who is the offer from?

jimjames

ROSSY wrote: »

The 2.5% is in total after 6 years the gamble is that the FTSE100 will be higher the 6400 in 2020 cheers

And it is exactly that, a gamble.

If you invest in a normal S&S ISA using funds then you are in control and can decide when you want to access the money rather than a set 6 years which might not be a good time for the FTSE.

So no, I don't think it is a good plan.

ROSSY

Santander is offering the plan

bowlhead99

ROSSY wrote: »

Santander is offering the plan

I guess after the trouble they've been in on selling their 'guaranteed' investment products in the past or understating investment risks to retail customers, they're not publicising it on their main retail site; perhaps you have to be a private banking / wealth management client to get it, or via an IFA. If you could post the full details or a link, perhaps someone could give you some pointers to the relevant bits of small print why it is a good idea or not.

Basically, if you'd invested directly in UK largecap stocks like the FTSE100, you'd get paid about 3%ish in dividends each year (many people wouldn't hold the exact FTSE100 proportions as the index isn't very diversified, they would probably look at more balanced fund options). But basically after 6 years at 3% compound, those dividends would be a 19-20% return.

However under this plan, the provider will keep all those 20% of dividends and just give you a binary yes/no return. You either get 34% (which is a 5% annualised return for 6 years - i.e. £1000 x 1.05^6 = £1340), or you get 2.5% (which is only £1025, virtually nothing). The returns under the second option is less than any one of those six annual dividend payments you could have got if you'd invested in stocks and shares, and probably won't even cover 1 year's annual inflation out of the 6 year term, so you end up losing likely 10% or more in real terms - depending on inflation - when you consider the spending power your £1025 has in the year 2020.

If the 'real world' FTSE went up by 15% or 20% or 30% or 40% on top of the 20% dividend growth (for a 35%+ total return), you wouldn't get any of that upside, they just cap you off at 34% total.

So effectively you are giving away the annual 3% compound returns of dividends, and any upside over 5% total return, to buy insurance that stops you losing more than about 10% in real terms.

The *expected* return from a basket of shares in the long long term is probably inflation plus 4-5 % (including both income and capital) although that might be slightly optimistic given that shares are not mega cheap at the moment. But basically we are saying the income and capital without being mega optimistic could reasonably return 50% over the period. If you take this product instead, you take away the chance of achieving the expected 50%, or anything more than 50%, because they're only going to give you max 34% whatever happens. If the shares perform just 'ok', paying their 20% of dividends as expected but not growing on the capital side, you get virtually nothing.

So, it's only a 'good' product if the real world shares give you the 3% divs and between 0 and 1% capital growth, to leave you in a position where you would have ended up with 20% divs and 5% capital growth in the real world, while instead you get a nice 'boost' from the product paying you 34% total. Still, that 'boost' is only worth 1 or 2% compound annual return and you only get it in a slim range of scenarios.

The other area where the product would help is if the FTSE takes a nosedive and is sitting lower than about 80% of today's level after the six years. In the real world, if FTSE capital value fell about 20% you would probably have got the 20% back through dividends to give you your £1000 back, and in the product world you get the guarantee kicking in to get you your £1000 back (plus the token £25). So it's kinda breakeven. If the FTSE capital value is lower than 80% of its current position then the boost back up to £25 from the product is more of a benefit.

But long story short, the product only helps you in a slim range of scenarios where the 'guarantee' helps (and it is not a real guarantee of course, there is still some counterparty risk that could allow the product to fail, but hopefully a slim one). While in many other scenarios, holding real investment funds yourself is a better bet, not least because you can sell up and walk away at whatever point you like.

So, I wouldn't buy this. If the main concern is avoiding a steep loss because you think FTSE will tank, and you need the money back in 6 years (i.e. in 6 years you wouldn't just roll it into another investment product), then simply hold cash in a high interest bank account until you think FTSE is no longer looking like it will tank. Santander themselves offer 3% in a current account (albeit, taxed).

From time to time you do get good structured products available on the market but they are scarce when interest rates are low and pickings are slim. While I don't think 50% total return from the FTSE over the next 5-6 years is necessarily on the cards, it is still possible. And so for you to gamble the 3% p.a. dividend and restrict quite a flexible range of returns and exit dates to secure a yes/no choice like "either it pays 5% a year return, or it pays you a negative return in real terms" based on performance in narrow bands - I don't think it's a good deal.

Freecall

I always find these structured products to be extremely complex. When you dig down and try to understand them they just seem to be even more baffling. They may have a simple marketing description but the beast you are ultimately investing in is often somewhat obscure.

As I never (repeat - never) invest in something I don't understand, I would not be interested.

I guess that there may be some niche market where the do make sense but I can't quite fathom what it is.