Abbey Super ISA.. advice please

fimonkey

Hi All,

Is this ISA any good in your opinion? It pays 8.1% and allows transfers in but the conditions state To open a Super ISA you must at the time of taking out the account, either invest at least the same amount in a Guaranteed Growth Plan.

I have 6K in an NS&I ISa and looking ot transfer it out since their interest rate sneakily dropped.

Would it be worth me transferring this 6K to the Abbey super ISA, then matching it with another 6K for the guranateed growth investment (the other 6K is currently in A&L e-saver earning 6.5% Gross and I'm a BR taxpayer) then adding 3K to the ISA in April? Would this be a good plan?

The guaranteed growth plan is for 3.5 or 6 year options, the 6 year option guarantees 18% return, is that really worth the WOW I think it is? (Or am I being a muppet and missing something obvious)?

And the 8.1% ISA is only guaranteed for one year, would I be bale to transfer these funds out next year to a better rate or is the money in the ISA locked in for the term of the guaranteed growth investment?

Thanks in advance

meester

18% over 6 years is 2.8% AER.

Not good.

Basically the deal is this: the Guaranteed Growth Plan makes Abbey lots of money (at your expense). Because they're so keen to get their hands on your money, they are prepared to give you a small bribe of an extra 2% on the ISA. But obviously the bribe is smaller than the amount they rip you off on the Plan.

Answer is, don't bother.

fimonkey

Ah thanks, so I was being a muppet

.. I so wish I understood interest rates, how does 18% over 6 years become 2.8% (Is it really as simple as 18%/6 years = 3?)

Thanks again

meester

fimonkey wrote: »

Ah thanks, so I was being a muppet

.. I so wish I understood interest rates, how does 18% over 6 years become 2.8% (Is it really as simple as 18%/6 years = 3?)

Thanks again

1.028 * 1.028 * 1.028 * 1.028 * 1.028 * 1.028 = 1.18

Compounding

To find the AER from a six year return, it's 1.18 ^ 1/6

fimonkey

Cheers meester, but I have no idea of what you're talking about. .. Where does the figure of 1.028 come frm, and where does the 1.18 come from? (The guaranteed growth is 18%, which is 0.18 right?)

Also, what does ^ mean? Is it divide or multiply?

(once upon a time many many moons ago I scraped a C in GCSE maths beleive it or not)

dunstonh

The GEB is naff.

They are cross subsidising the interest rate on one side by using some of the profit on from the GEB (which is a cash cow for banks).

Just compare that Abbey GEB to the Premier GEB mentioned on recent threads to get an idea of the quality difference (and remember that most of us on here class GEBs are very poor quality products normally).

meester

fimonkey wrote: »

Cheers meester, but I have no idea of what you're talking about. .. Where does the figure of 1.028 come frm, and where does the 1.18 come from? (The guaranteed growth is 18%, which is 0.18 right?)

Also, what does ^ mean? Is it divide or multiply?

(once upon a time many many moons ago I scraped a C in GCSE maths beleive it or not)

The 18% growth is .18. Which means you invest 1, and get back 1.18

^ means to the power of.

so, if i is the annual return, then
i^ 6 = 1.18
i.e.
i * i * i * i * i * i = 1.18 (i multipled by i six times)
to work back, you want to find an equation with i on the left-hand side.
This can be done by taking the sixth root of 1.18. To convert from a root to a power (which is easier to write, without a root symbol), you take the reciprocal of the number (i.e. one divided by the number,
so
i = 1.18 to the power of 1/6

The answer is i = 1.028, which is where I got that number from.
As you might notice, 2.8 is slightly less than 18/6 = 3 - because you are getting interest on interest. So you could estimate the annual return simply by dividing the total return by the number of years. This is better if the number of years is not too large, and the interest rate is not too high - for instance, 75% growth over 25 years, which is 1.75 ^ 1/25, is only 2.26% AER, which is closer to 2% than the 3% you'd estimate from 75/25.

Equally, 100% growth afer 5 years, is not 20% per annum, it is actually 'only' 14.9% - this shows the cost of debt at high rates quickly becomes enormous, or alternatively if an investment performs well year-on-year - 15% is very good - then you quickly double your money. The effect of his can be seen on something like Warren Buffet's Berkshire Hathaway shares, which have grown 15% year-on-year for 40 years, and are now $150,000. Even in 1990, one share would have only been $7,000. There are very very few companies that do this, but the effect of compounding made anyone who invested at that time now rich indeed.