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National Savings & Investment Guaranteed Equity Bond
Play the stock market without risking a penny exclaims the brochure. This product gives you the opportunity to invest as little as £2,000, and benefit in the returns the stock market makes over the next 5 years, without risking a penny of your capital!
It sounds too good to be true. so, how good is it Really?
Who are National Savings?
Basically, the UK government. This has the advantage of being considered to be free of the risk of going under, unlike a bank, adding an extra layer of security to your money! National Savings are the UK's second largest savings institution, only Halifax looks after more of the country's money.
What can i invest?
£2,000 is the minimum investment. £1m is the maximum, although this is doubled for joint holdings. Strangely, neither Mrs Daveops or myself is going to be troubled by the upper limit.
Can I access my money?
No. This is a 5 year investment maturing in june 2008. the only way you can get to the money within that term is to die! You cannot add to a bond during its term, although you are allowed to hold up to 5.
Is it tax efficient?
No. All gains made are subject to UK Income Tax. In other words, the gains made will all be liable for tax in the 2008/9 tax year. This can have its advantages. if you think that you will pay a lower rate of income tax in 2008/9 than you do now (eg retirement, planned career break or family etc) this can be an excellent way of deferring the tax bill. There will, however, be 5 Budget's between now and then for Chancellors to change tax rules and blast any prudent planning on your part to smithereens! If you anticipate returning to the workplace or moving up a tax bracket in the 5 year period, you could get stung for a higher tax bill! Interestingly, the interest will be paid gross (without tax deducted) and you will need to declare the income on your tax return. the gains are treated purely as income and are not subject to capital gains tax. gains made from "real" dealing in stocks and shares are subject to capital gains tax. it may well prove more tax efficicent to realise a capital gain in 2008/9 rather than get a big income tax bill. You need to know your own circumstances and trust the government to know for sure!
Can I invest for my children?
Not directly. but you can take out a bond in trust for a minor. Seek professional advice regarding the taxation of income for a minor after checking out the rules in www.inlandrevenue.gov.uk.
How Much Will It Make?
First of all, the investment runs from 17th June 2003. If you invest prior to this date, you will earn 3.25% pa (gross taxable) on your money up to 16th June 2003. The full amount is then invested.
Secondly, you cannot lose capital. While the return on this bond is linked directly to the FTSE100 index, if the FTSE should fall, you will get back your initial investment. Remember, if you had chosen to invest in a normal bank savings account, you would have earned interest. In this scenario, you have risked the interest you would have earned for no gain.
Thirdly, if the FTSE100 rises between 0% and 65% during the 5 year period, you will get the FULL return of the FTSE100 without taking any of the risks associated with stock market investment. This is the best scenario, unless interest rates on bank savings account rocket over then next few years, which seems unlikely.
The final scenario is that the FTSE100 grows by more than 65%. You will only get 65% of the growth in this situation. In other words, if the FTSE100 grows by a massive 200% (unlikely), you will only get 65%. THIS PRODUCT WILL NOT MAKE YOU RICH!
There is also a proviso that averages the FTSE over the final 6 months. This means that if the FTSE enters the final 6 months of your investment on a high, and the crashes prior to maturity, you will still receive a return based on the average of the FTSE in the final 6 months. This could work against you if there is a big gain close to the end of the investment.
Are There Any Charges?
There are no management fees or charges. It should be pointed out that any dividends paid by the companies in the FTSE100 are NOT added to your investment or the value of the FTSE100. In other words, if you invested directly in to a Tracker Fund (a fund that buys shares directly in the FTSE100 on your behalf), you would benefit from the dividends paid.
Is It Right For Me?
It could be. As a no risk investment that could defer tax liability to a time when you would pay less, it has a lot going for it.
You should also consider the interest you would lose by not investing in a safe savings account, if the FTSE100 only grows a little or falls. And you should consider the dividends you would lose by not investing directly in the FTSE100. There is also the money you will not make if the FTSE100 grows by more than 65% over the 5 years!
Using the following examples, I have made approximate calculations as to what you can typically expect to make in the following circumstances. These are pure conjecture as I do not own a crystal ball and you should not make an investment decision based on this information.
Investment: £10,000 FTSE100 Growth: 8% per year High St Savings Rate: 3.5% per year Income Tax Rate: 20% FTSE100 Dividend Yield: 3% per year reinvested Tracker Fund Charge: 1% per year
High Street Bank Account: £11,480 Guaranteed Equity Bond: £13,754 Tracker Fund: £15,751 (the £5,751 is subject to capital gains tax, although this sum is less than the tax allowance, so if this is your only gain in that tax year, no tax will be payable! If that does not make sense, I refer you to www.inlandrevenue.gov.uk again! Investments in an ISA wrapper legally avoid Capital Gains Tax anyway).
Different returns can paint a different picture though ?
FTSE100 Growth: 3% per year High St Savings Rate: 3.5% per year Income Tax Rate: 20% FTSE100 Dividend Yield: 3% per year reinvested Tracker Fund Charge: 1%
High St Bank: £11,480 Guaranteed Equity Bond: £11,274 Tracker Fund: £12,427
And finally, let us repeat some of the happenings of the last few years and watch the FTSE100 slip!
FTSE100 Growth: -1.25% per year High St Savings Rate: 3.5% per year Income Tax Rate: 20% FTSE100 Dividend Yield: 3% per year reinvested Tracker Fund Charge: 1% per year
High St Bank: £11,480 Guaranteed Equity Bond: £10,000 Tracker Fund: £10,017
Now, I apologise for totally confusing you there. The message I was trying to get across is that while on the face of it, this seems good, if you really want to play the stock market and are prepared to risk your capital, you have a much greater potential for gains than the Guaranteed Equity Bond. Equally, if you were considering investing in this because you do not like risk, it is possible to get back less than you would have done in a normal bank savings account!
I will give you the chance to ponder your own attitudes to risk, your own tax situation and the other options available for your money. Ethical investors should remember that this is an investment in the UK Government!!
If you still like this one, have a closer look at www.nsandi.com or ring 0500 500 000. There are also blue leaflets with a shell on the cover in most Post Offices.