Guaranteed equity bonds
Guaranteed equity bonds have been hugely popular in recent years, with savers rushing to the high returns and perceived security of these bonds. On the other hand financial websites and pundits are almost unanimously sceptical of these bonds.
These bonds are marketed as a risk-free method of using your savings on the financial markets, for example the FTSE100. They are theoretically guaranteed as you are promised at least your original investment back.
The way these bonds work is simple, you invest in your savings in one of these bonds which is then tied up for a fixed period, usually 3-6 years. The return you receive is linked to how well the stock market it is linked to is, for example the FTSE100. If the stock exchange falls in that time you receive your original investment guaranteed at the end of the term.
The banks make a profit on these bonds by investing your money into these stock exchanges and taking the returns and dividends. In the event of a loss the bank will pay for your guaranteed investment using other funds. The problem lies when the bank goes bus, as Lehman brothers did, and therefore is unable to pay back the bonds, meaning that you lose your return.
These GEBs traditionally yield an attractive return for investors and is essentially seen as the key to their success. Some pundits complain that GEBs return a minimal amount compared to the amount of money the bank makes through dividends and playing the market.
These GEBs are also not linked to inflation, so if you were returned your original amount after five years, due to 5 years of inflation you will essentially be making a loss after tying up a tidy sum for such a long time.
The returns on the GEBs are also taxed as income rather than capital gains, meaning that those who are close to the boundary might be pushed into a higher tax boundary. GEBs often have a wide range of charges which are ‘hidden’ from initial applicants, be sure you have read and understand all the terms and conditions. An example of this is the hefty fee savers have to pay if they wish to withdraw money early from the scheme.
GEBs remain one of the most popular options for savers, combining a “risk free” appeal with relatively high interest rates. While they can be solid investments its vitally important you fully research any GEB you wish to invest in as there is a huge variation in conditions, fees and charges.