Abbey Guaranteed Growth PAln 10 (5.5 Year) - A bad investment?

[Deleted User]

OK. These figures make things a lot easier for me to understand. Thank you everyone!

It seems that it all depends on what happens to interest rates in the future, but right now I'd be doing quite a lot better (a few thousand over the 5.5 years in total on £110,000) if I were just investing in good savings accounts. Right?

My partner and I each have the following invested in the Guaranteed Growth Plan:

- Investment ISA's : £7,000
- Direct Share Investment Plan : £18,000

In addition, I've inheritted a £60,000 GGP from my mum.

All are due to mature at about the same time (In a little over 4.5 years).

So two options for me to consider then...

1. Cut our Losses.

At the 5/1/08 my partner's and my £25,000 investments had a cash in value of £23,837.61 each. I imagine it's now higher. That's a loss of £1,162.39 each - probably a smaller loss if we cashed in now.

Right now we could get 7% on a 1 year bond, but we'd need to be guaranteed this or more EVERY year to make up for what we've lost. Right? So cashing in and taking our money elsewhere probably isn't a good option.

And it's always possible that this GGP could actually do well :
a) if interest rates drop over the next few years , or
b) if the stock market does exceptionally well.

2. Minimising Capital Gains Tax

Because I'm inheriting a £60,000 GGP plan from my mum I will actually have an £85,000 investment when I add it to my £25,000 which matures the same year.
We haven't actually split my mum's bond between my brother and I yet. Would it pay to split it three ways so my partner and I share my half of my mum's bond? I am executor of my mum's will so I guess there's nothing to stop me doing this. This would give us an investment of £55,000 each, and that should keep us below the threshold for Capital Gains Tax (provided I'm right about the purpose of wrapping some of it in an ISA).

I assume the reason part of my partners and my investments were wrapped in an ISA was to make that part exempt from Capital Gains Tax?

[Deleted User]

I've just searched the government website on Capital Gains Tax. It says:

If you inherit an asset, the estate of the person who died does not pay CGT at that time. If you later dispose of the asset, you work out the gain by looking at the market value at the time of the death.

At the time of my mum's death her GGP was worth less than she paid into it so I'm hoping this means it's not going to be liable to capital gains tax - no matter how much it's worth at maturity. Please someone tell me I'm right about this

[Deleted User]

A little more research and I'm feeling much better about this.

Firstly, it seems that the GGP (Issue 10) was a good one. The others that I've looked at from the Abbey, including the current one, guarantees 20% over 5.5 or 6 years. Mine guarantees 25% over 5.5 years. I have a vague recollection of the Abbey Financial Advisor telling me that the issue 10 was one, but I assumed that was just sales talk.

I've taken a look at the NS&I site and their 5 year guaranteed rate is only offering 3.8% net wheres mine works out at essentially 4.14% net (I believe?). And my bond at least offers the *possibility* of a good bit more if it does well.

At the time I set this up I wasn't under any illusions about getting the best possible investment. I just wanted something that was reasonably competetive with other banks, and something I could set up and leave for a few years (that's what I wanted at the time..although not now). Having looked at it in more detail I'm feeling quite happy that what I got was OK. And who knows, it could do well if interest rates fall!

It does go to show that you shouldn't be too quick to be alarmed by what you read. It's worth thinking it through in detail as in your own case it might not be as bad as the experts are saying!

Thanks to everyone that took the time to help me figure this out. It's much appreciated!!

dunstonh

Issue 10 I think paid 25% over 5.5 years or 50% of the FTSE100 growth.

The reasons it is bad are:

That 25% equates to 4.1% p.a. so that is a pretty poor rate.

The FTSE100 has been a low quality index to track for 14 years. So straight away you are picking a low quality index (its been one of the worst performing indices in the Western world).

You are not being paid dividends so are losing around 3% p.a. That effectively is an implicit charge of 3% p.a.

You are only going to get 50% of the FTSE100. If you took long term average growth on the FTSE (without dividends) at 5% p.a. then that is 31% growth over 5.5 years. However, you are only getting half that so 15.5% is what its likely to pay out if you achieve typical long term average. Thats less than the 25% so thats all you are going to get.

The level of FTSE growth required over the 5.5 years was too high for where we were in the economic cycle. Whilst future returns are unknown, I doubt there was anyone who believed that the FTSE100 would grow by 50% in the following 5.5 years.

Compare it to other GEBs available and it was poor value. The most popular GEB we have seen on this board was the Premier one which paid 16% after year 1 if the FTSE was 1 point higher than when you went in. If it wasnt it rolled into year 2 and if after year two it was 1 point higher than when you went in it paid 32%. If not, it rolled over and carried on at 16% a year until 96% at the end of year 6. If it was down at that point your money was returned. If it was 1 pt higher your money plus 96% was paid out. The requirement to be just 1 point higher at an anniversary point in any of the next 6 years was good potential and you can see the figures were a lot more attractive than the Abbey version.

It isnt an exact match for your needs but would have been worth it for some of the money. You could have then had a range of other versions which gave 100% of FTSE growth or used other indicies. Or an inflation guaranteed product such as the NS&I certificates.

Basically, with that amount and what you need for security, you should have had a range of about 4 or 5 products and a good liquid fund left.

It does go to show that you shouldn't be too quick to be alarmed by what you read. It's worth thinking it through in detail as in your own case it might not be as bad as the experts are saying!

So, you can see that what you have is miles away from the best options that were available. I know your posts have been generally anti IFA but you will find all the regulars here who are not IFAs are equally critical of GEBs in general and in particular the rubbish versions the banks offer. The last decent GEB I saw from a bank was around 1995 when Lloyds Bank did a Premier bond under the life assurance tax wrapper. They dont come along often and IFAs can recommend most of the bank's GEBs if we really wanted to (as most make them available to IFAs).

meinnit

Deleted_User wrote: »

Abbey Financial Advisor

Thats a joke!

For a better guaranteed return a savings account would be a better option. Also means your money isn't tied up for 5.5 years.

[Deleted User]

dunstonh - I've made it clear already that I'm not anti IFA. I think it's more the case that my tollerance of risk makes me unlikely to seek out the services of an IFA. I like to put my money into savings and I think with sites like this available the DIY approach is best and cheaper.

I'm very grateful to everyone that contributes opinions and information - including you - and I process it all and decide what's best for me. What I will say is that what many IFA's suggest doesn't fit well with my tollerance for risk. Despite their claims to the contrary! You keep comparing this to investments without guarantees to convince me I've got a bad deal. But what you fail to grasp is that I'd never agree to something that didn't have a cast iron guarantee. I'm financially secure. My no-risk approach to life has left me better off than many so don't be so quick to knock it.

Based upon what I wanted / needed at the time I'm content that what I ended up with is OK. The Abbey's financial advisor did what I asked rather than browbeating me into (in my opinion) risky investments because he believed the returns would be better. He offered these things and I declined. What I've got compares OK with other options that I'd have been willing to consider at the time and that's all I can ask for.

I get the message that you'd have found something better. And presumably you'd provide a cast iron guarantee of a return of more than 25% in 5.5 years with a chance (albeit small) of more. If that's the case then I'd have jumped at it. But you weren't there when I was hurled into this crisis and I didn't have time to track you and your superior guaranteed investment down.

Our of interest, what percentage WOULD you have guaranteed me over 5.5 years?

I think someone on another thread highlighted this problem. It's all very well harping on about how this person or that person would have done better for you. But the problem is in an urgent situation we simply have no way of finding these people. We run the risk off instead finding a fraudster that would loose all our money for us. You can't trust unknown strangers when you don't have time to vet them and research what they tell you. Whatever your personal view of the Abbey's Financial Advisor he did EXACTLY what I wanted at the time. And now that I've had time to review everything I don't think I've done that bad when you consider that I limmited myself to what a single bank could offer me. You hear so many stories of people making no money or even loosing part of their capital - and that can happen to people that seak out the best IFA.

In retrospect it is a greater risk than I'm comfortable with simply because my money is tied up and I'm left hoping that interest rates fall. Now that I'm not preocupied with holding my parents hands while they died painfully and slowly I'd much rather have NOT tied the money up and just moved it to the best paying account at the time. But when I set these GGP's up ALL I wanted was to get the money put somewhere quickly where it would be guaranteed to earn reasonable interest and didn't need reviewing for a few years. I didn't know how long my mum would linger on. But who knows - if interest rates go down I could be pleased that I took this option.

So relax. I'm not trying to tell anyone that this is the best possible way to invest money. But when you consider the crisis and turmoil I was in at the time, the fact that how much interest I earned was the last thing on my mind, and the fact that I had ZERO time to think about how It was invested I came out of things quite well.

I would be devestated if I'd let some high flying advisor browbeat me into something that didn't have a cast iron guarantee. (And in the vulnerable state I was in it could easily have happened). What I've got beats what I'd get with a 5 year guaranteed NS&I bond and gives me a tiny chance of a bigger payout. That's OK.

I've got £110,000 tied up in this GGP. I've got another £80,000 that I plan to just switch between the highest paying accounts and cash ISA's. If interest rates go down the GGP does well. If interest rates go up my £80,000 does well. That fits well with my tollerance of risk and I'll be happy. Nothing on god's green earth would convince me to invest any of this money in investments that didn't come with a guarantee that would at least match what equivelent term NS&I investments are offering.

I'm financially secure and not prepared to throw that away in the hope of big gains. I've got a business that might make me very rich one day and that's in my hands - not someone elses. There is no reason or need for me to take risks with what is already a big enough pot of money for my needs.

Now if someone somewhere has these wonderful guaranteed long term investments available that can beat the Abbey and NS&I 5 year bond hands down why don't they just advertise them so that we all have easy access to them?

dunstonh

You keep comparing this to investments without guarantees to convince me I've got a bad deal. But what you fail to grasp is that I'd never agree to something that didn't have a cast iron guarantee. I'm financially secure. My no-risk approach to life has left me better off than many so don't be so quick to knock it.

No, I have illustrated how poor the GEB you have is against other GEBs and NS&I certs. At no point have I suggested anything without some or total guarantee.

Now if someone somewhere has these wonderful guaranteed long term investments available that can beat the Abbey and NS&I 5 year bond hands down why don't they just advertise them so that we all have easy access to them?

They do. However, many of them are only available through the whole of market distribution channels or appear in financial press.

[Deleted User]

dunstonh wrote: »

They do. However, many of them are only available through the whole of market distribution channels or appear in financial press.

By 'whole of market distribution channels' what exactly do you mean?

Does Joe and Jane average have direct access to these 'whole of market distribution channels'?

And why only advertise in the financial press? How many people read that?

The point i'm trying to make is that if what NS&I and the big banks and building societies are offering is so bad, then why on earth don't these people that have good products just let people know about them with a bit of sensible advertising?

Is there a list of these products on this website somewhere? Or is there some catch....such as "you need to use an IFA to find out about them"?

DRS1

I've just searched the government website on Capital Gains Tax. It says:


Quote:
If you inherit an asset, the estate of the person who died does not pay CGT at that time. If you later dispose of the asset, you work out the gain by looking at the market value at the time of the death.
At the time of my mum's death her GGP was worth less than she paid into it so I'm hoping this means it's not going to be liable to capital gains tax - no matter how much it's worth at maturity. Please someone tell me I'm right about this

No CGT on your mum's death, that is right.

On maturity you work out the gain by subtracting the value at her death from the value at maturity. If that is less than the annual allowance then again no CGT but if it is more then you pay CGT at 18% (currently) on the amount over the annual allowance. I thinks that is how it works now (unless they reinstated taper relief when I wasn't looking).

The thing is you are going to have a reasonable amount maturing in the same tax year so you may well go over the annual allowance. You mention splitting the GGP three ways. I know you are her executor but I don't think that means you can just do what you like. You need to see what her will says and if you want to change that then you will need to do a deed of variation of the will (which needs all the beneficiaries to agree as I recall). I that is your plan, you may be getting into territory where you need some legal advice.

I suppose you could just give away part of your inherited share of the GGP to your partner but I am not sure if you are married or not. Spouses and civil partners can make gifts to each other without worrying about CGT but unmarried partners can't - there used to something called a holdover election but I can't remember if that is still somthing you can do.

Sorry if this sounds like a bit of a meal but these are things you may need to think about.

DRS1

Is there a list of these products on this website somewhere? Or is there some catch....such as "you need to use an IFA to find out about them"?

There is a list of sorts here, which includes the latest version of the Premier product dunstonh has been describing above. I have no idea how good any of these products are nor have I used the site to invest so DYOR and take care.

http://www.moneyworld-ifa.co.uk/Income_Bonds/index.htm