5 Year @ 2.25% per annum

dunstonh

The product reminds me of the old short lived Insurance ISA.   i.e. life funds within the ISA.    
I can understand the confusion as the terminology used by them is mixed.  It is not an investment bond.  Despite it being in life funds.   However, the product is real and correct.
The terms are not very attractive though and I wouldn't use it for that reason.

drphila

Malthusian said:

Me neither. This is the first time I've encountered a (non-NS&I) "guaranteed growth bond" in the wild, i.e. a long term insurance product which works like a fixed-term deposit, but my understanding is that they are a thing. If they're not it's the weirdest and most low-key scam ever.

The catch is the inherent unattractiveness of getting only 2.25% for funds you can afford to lock up for five years. (And most people who can lock up money for five years can in reality invest it for longer, nobody has a spending need that will arise in exactly five years' time and cost exactly £X.)

drphila said:

More than that, 5 yr non-ISA products invariably don't allow any withdrawals, penalty or not.

Still haven't convinced myself there's not a catch, but for the ISA version, as a taxpayer, the effective interest rate (c. 2.8%) is extremely attractive.

The effective interest rate is 2.5% unless you are a taxpayer with interest exceeding the personal savings allowance, which is very different from "taxpayer". (PSA is £1,000pa for a basic rate tax-payer, so if you are a BRT and your average interest on your non-ISA cash is 1%, you need non-ISA cash of £100,000 to start paying tax on interest, in the absence of other interest income.)

Since April 2016 it is no longer as simple as "2.5% of tax-free interest = equivalent of 3.1% of taxable interest for a basic rate taxpayer". (Not sure where 2.8% comes from and happy to be corrected.)

Thanks for pointing that out, I've clarified my post.

If I invest £1000 in a non-isa product paying 2.8%, I'll get £28 interest which after tax will be c. £23.

If I invest £1000 in a isa product paying 2.25%, I'll get c.£23 interest which after 0% tax will be c. £23

(Calcs ignore compounding)

Malthusian

Your effective interest rate is still underselling it for the tax situation described.

For a basic rate taxpayer who is over their PSA and pays 20% tax on further interest income, 2.5% tax free (£25 of interest) is equivalent to 3.1% taxable (£31.25 of interest = £25 after 20% tax).

Reaper

Although I had not come across them before it appears they are not the only ones offering these products. This Is Money reviewed two previous offers. Like me they instinctively shy away from them but I have yet to see any definitive reason why they would not be a suitable alternative for a saver looking for a fixed term, particularly as unlike a savings account with a £85k cap these offer unlimited FSCS cover.
Unity Mutual
Shepperds Friendly

eskbanker

Malthusian said:

Your effective interest rate is still underselling it for the tax situation described.

For a basic rate taxpayer who is over their PSA and pays 20% tax on further interest income, 2.5% tax free (£25 of interest) is equivalent to 3.1% taxable (£31.25 of interest = £25 after 20% tax).

But where did your 2.5% come from?  The rate of the product being discussed is 2.25%, hence the grossing up only as far as 2.8%....

bowlhead99

Malthusian said:

Your effective interest rate is still underselling it for the tax situation described.

For a basic rate taxpayer who is over their PSA and pays 20% tax on further interest income, 2.5% tax free (£25 of interest) is equivalent to 3.1% taxable (£31.25 of interest = £25 after 20% tax).

Well, he's underselling it if it were a 2.5% net product (which would indeed be the same as 3.1% less 20% tax), but the reason you are not able to match his maths is that you are doing the maths on a 2.5% net product, while he's doing the maths on a 2.25% product as per the thread title (which is  the net of basic rate tax figure for 2.8% gross).

drphila

dunstonh said:

The product reminds me of the old short lived Insurance ISA.   i.e. life funds within the ISA.    
I can understand the confusion as the terminology used by them is mixed.  It is not an investment bond.  Despite it being in life funds.   However, the product is real and correct.
The terms are not very attractive though and I wouldn't use it for that reason.

I assume by unattractive terms, you mean tying up capital for 5 yrs in a potentially increasing interest rate economy?

As for the This is Money article cited by Reaper,  in one para it says "2.85 per cent annually, rolled up and compounded." and then in another it says interest is added after 5 yrs?  There was a thread on this recently in respect of another 5yr product offered by one of the unfriendly societies and the key point with that was that, unlike most 5yr products paying monthly or yearly interest, if the firm goes bust before the 5yr term only your capital is covered by the FSCS.

And the final sentence of the article seems to mirror the discussion on here, in that their expert says "In my opinion, there's little upside here to justify the increased risk" without specifying what exactly that risk is!

NottinghamKnight

unkle said:

NottinghamKnight said:

Fundamentally a low return product with potential penalties for early withdrawal, some risk of capital loss. Little to recommend it.

You keep taking about some risk of capital loss, but haven't shown that, the product does not state that your capital is at risk.

As for penalties for early withdrawal, what 5 year product doesn't!

It makes reference to fscs protection but this is not the cash savings protection as it is an investment/ life insurance product. Note that the literature states you may be covered by fscs, as to why the state may is unclear, it could be that it is determined it is not an insurance product for example and so if the company defaults the implied cover would not exist. Please note I'm not trying to dissuade you from investing, if a product without full fscs cash protection over 5 years with a maximum return of 2.25% is attractive then by all means fill your boots, I'm not persuaded.

Reaper

NottinghamKnight said:
Note that the literature states you may be covered by fscs, as to why the state may is unclear

The "may" is standard wording because the FSCS doesn't rule on active savings/investments, it only looks at ones that have failed at which point it decides whether or not it is covered. So, for example, if you look at the wording for a bog standard Barclays deposit or savings account it is says (with my emphasis):

All Barclays Bank UK PLC savings and current accounts are covered by this scheme, so in the event that we were unable to meet our obligations to repay money that you have invested with us, or interest, you may be entitled to compensation.

As far as I can see this product is solidly covered. I'm not sure it should be but I believe it is.

Audaxer

NottinghamKnight said:

unkle said:

NottinghamKnight said:

Fundamentally a low return product with potential penalties for early withdrawal, some risk of capital loss. Little to recommend it.

You keep taking about some risk of capital loss, but haven't shown that, the product does not state that your capital is at risk.

As for penalties for early withdrawal, what 5 year product doesn't!

It makes reference to fscs protection but this is not the cash savings protection as it is an investment/ life insurance product. Note that the literature states you may be covered by fscs, as to why the state may is unclear, it could be that it is determined it is not an insurance product for example and so if the company defaults the implied cover would not exist. Please note I'm not trying to dissuade you from investing, if a product without full fscs cash protection over 5 years with a maximum return of 2.25% is attractive then by all means fill your boots, I'm not persuaded.

I'm not convinced it is fully covered by FSCS either. I would think it has possibly the same cover as other investments - up to £85k, but normally for investments that would only apply if you lost all or some of your money because a major fraud had taken place within the fund, or you were given bad advice. If whatever they invest in makes a loss or not enough growth after 5 years to pay you back the capital and the annual 2.25%, I wouldn't think you would be successful in a claim through the FSCS.