Abbey 50% Growth Plan

Simsybloke

Folks,
(This is my first post here... so be gentle if I break any ettiquette!)

I recently picked up a leaflet from Abbey about a 50% growth plan.
Basically it works like this;

You deposit money.
It stays there for 6 years
If, after 6 years, the FT index has increased, at all, you get back your investment + 50%. If it hasn't gone up you get your investment + 6%.

There is an "averaging" element where the final FT value is actaully the average of the final 6 months, but otherwise it seems very straightforward.

Now I have a couple of questions...
1) If I've done the arithmetic correct, 50% gross over 6 years works out to almost exactly 7% gross, compounded, if paid net annually, (basic rate tax). That seems a good figure to me. Have I done the arithmetic correctly?

2)I've never been one to follow the FT, (until recently, keeping an eye on a pep/isa), but it seems to me that the likelyhood of there not being an increase in the FT index over 6 years is very, very small. Or have I got that completely wrong? Have there ever been a moment when the FT has not been higher than it was 6 years previously?

Am I missing something?

Thanks in anticipation.

Regards,

Simsybloke

Jonbvn

Sorry but these Guaranteed Equity Bonds (GEB's) are generally considered as a very poor investment. The reason being is that you get none of the dividends from the underlying stocks & shares.

When you see returns on FTSE (or whatever market) trackers, it is based on dividends being reinvested. If you take these dividends the rises are nowhere near as attractive.

HTH.

CLAPTON

I dont know the product but are you sure you get 50% back or do you get 50% of the growth in the FT100 i.e. if the index goes up by 40% you get back 50% of 40% i.e. 20%??

dunstonh

but it seems to me that the likelyhood of there not being an increase in the FT index over 6 years is very, very small. Or have I got that completely wrong? Have there ever been a moment when the FT has not been higher than it was 6 years previously?

Yes. More people with these types of plan have only had their capital returned than those that have seen a surplus (lock-ins excluded).

They are an awful product designed to sound good to people that dont understand investments. Easy to sell, easy to buy, hard to spot hidden costs and lack of potential unless you know what you are missing out on.

Simsybloke

It's definitely 50% of investment...

http://www.abbey.com/csgs/Satellite?c=GSProducto&cid=1181581141156&pagename=Abbey/GSProducto/GS_InfProducto

I realise it looks good...
And I'm not an expert, that's why I'm asking.

It doesn't seem to me that It relates to dividends at all?

dunstonh... was your "Yes" an answer to my FT/6 years question?

Do any of you experts see any catches?

Thanks,

Regards,

Simsybloke

SeanW

It is 50% of your investment, as long as the FTSE is up, which as you say, is 7% a year.

Catches?

If it's down or the same, you get less than 1% pa.

If it's up 200%, you still only get 50%.

The subject to averaging means that they read the FTSE closing value each day over the last 6 months, then take the average as the closing value. This means if its 999 for all of the 6 months, but 1001 on the last day, you get just your 6% as the closing value is not up.

It's not based on dividends, but what is meant is if you invested straight into the FTSE, and it ended down, you would still have taken dividends during that time, but not in this product.

Simsybloke

Seanw...

Thanks for that.
With regard to the catches,
I get your first two points, but regarding the averaging thing, I'm not sure I agree with you...

999 for 179 days, then 1001 for just one day, surely gives an average of 999.01, which is higher than 999, which was at the start?

And anyway, the FTSE 100 needs to go up over the 6 years, not just the last 6 months...

To quote from the leaflet;

When will I get the 50% Return?
Your investment is linked to the FTSE 100 Index.
We take an initial measurement of the Index on the strike date (the date your money becomes linked to the performance of the FTSE 100 Index) and another on the close date (after six years). If the Index has gone up by any amount, even a fraction of a point, you will get your capital back plus an additional 50%. So if you invested £10,000 you will get back £15,000. Please note the final measurement is subject to averaging (see "what is averaging" below).
Whilst past performance is not a guide to future performance, if you believe that the FTSE 100 Index is going to go up over the next six years then 50% Growth Plan could be a good investment for you. If you are uncertain which investment is right for you we have investment specialists in branch who can advise you – please pop into a branch or call to make an appointment. You should be aware that the FTSE 100 Index does not include any re-investment of dividend money from shares.

When will I get the 6% return?
If the FTSE 100 Index goes down or stays the same over the six years of your investment you will get back your capital plus an additional 6%.
So if you originally invested £10,000 you will get back £10,600 at maturity. Whilst this is clearly not as compelling as a 50% return you won't lose a penny of your capital and you are making a gain when the FTSE 100 Index is decreasing. You are therefore protected against any downturns in the market. Please note the final measurement is subject to averaging (see "what is averaging" below).

Now I appreciate that there may be better ways to invest over a 6 year period, but with this, the capital is guaranteed.

The crux, it seems to me, is the likelyhood of the FTSE not increasing over a 6 year period.

I suspect this is highly unlikely. Am I just being blinkered,or is that a reasonable assumption? Has there ever been a time when the FTSE has been lower than it was 6 years previously?


Thanks again,

Regards,

Simsybloke

dunstonh

I suspect this is highly unlikely. Am I just being blinkered,or is that a reasonable assumption? Has there ever been a time when the FTSE has been lower than it was 6 years previously?

Yes there has been periods when the FTSE100 has been lower after 6 years. The FTSE100 has also been one of the worst performing indicies in the western world for well over a decade. You dont think for one minute that Abbey will be investing the money in the FTSE100 do you?

You get no dividends and track a poor quality index and have limited diversification. Build a high yield portfolio with a 5% income and that income after 5 years would cover a potential shortfall. Especially if you go 50/50 with a cash ISA as the other half.

Aegis

Simsybloke wrote: »

When will I get the 6% return?
If the FTSE 100 Index goes down or stays the same over the six years of your investment you will get back your capital plus an additional 6%.
So if you originally invested £10,000 you will get back £10,600 at maturity. Whilst this is clearly not as compelling as a 50% return you won't lose a penny of your capital and you are making a gain when the FTSE 100 Index is decreasing. You are therefore protected against any downturns in the market. Please note the final measurement is subject to averaging (see "what is averaging" below).

Now I appreciate that there may be better ways to invest over a 6 year period, but with this, the capital is guaranteed.

Even if inflation stays at 2% the whole time, the overall inflation during your 6 year period will be in excess of 12%, which means that your capital will be worth less at the end than it would now.


If you go to this page and have a look at the maximum range of years for the FTSE 100, you'll note that probably about half of people who invested in the sort of thing you're talking about would have lost money. I can't find any longer term data straight away, so I can't say what happened over longer, but I reckon you'd find that in the long term, more people lose out than you might think.

Simsybloke

I do understand, almost, all that has been put.
I hadn't appreciated that the FTSE was so poorly regarded.

The attraction of this was the fact that the capital is safe.

I can now see that the investment "potential" of this is not as sure as I had envisaged.

Rest assured that I wouldn't have committed to this without taking more thorough advice... but now I don't need to!

Thanks all,

Regards,

Simsybloke

bowlhead99

Simsybloke wrote: »

I do understand, almost, all that has been put.
I hadn't appreciated that the FTSE was so poorly regarded.

The attraction of this was the fact that the capital is safe.

Well yes they can afford to protect your capital by putting the returns are at risk. You either make 1% or 7%.

If you put your money in a decent interest bearing bank account or preferably ISA you can at present do better than half way between 1 and 7, also with no risk to your capital. This deal sounds like a straight bet on whether the FTSE is up or down, not offering you something linked to how much the FTSE is up or down. So its not really investing, more a gamble!

Dunstonh makes a good point, if you believe the markets will generally do OK over the next 6 years invest half (opportunity for dividend income and growth with risk to half of your capital) and save the other half (cash ISAs, fixed rate deposits, regular savings accounts etc giving you a decent rate without risk).