What is a Guaranteed Equity Bond

In a previous article I mentioned Guaranteed Equity Bonds (GEB) but are they everything they claim to be. Like most things in life do check to see what you are really buying. Unsuspecting buyers will think by investing in a GEB their money is safe and in the majority of cases it is, but for starters a GEB is not guaranteed.

On paper a GEB looks good. Most are for a term of 3-5 years and theoretically the original sum invested is guaranteed. The GEB will be linked to how a stock market performs. If the market rises then you will make a healthy profit, if it falls over the period you'll get back your original sum. But to properly decide whether a financial product is the right one for you, you should also balance the disadvantages against the advantages.

A GEB is normally sold by a big name company but that doesn't mean they will offer the guarantee. Chances are an investment bank designs and manages the GEB while the big brands company heavily promotes and sells them. The guarantee would probably be with the bank, however anything the financial services industry do will always making sure they get the better deal with the least risk, even if this is at the expense of their customers.

The biggest downside to GEBs is they don't receive a dividend income from the shares or indexes they invest in. Over 3-5 years this lack of dividend adds up.

If the stock market moves lower over the term of the GEB you should get your money back but due to inflation the money you invested today will not have the same purchasing power in 3-5 years time.

Your money is locked for the term with no chance of early redemption and for many 5 years is too long.

Returns from GEBs are taxed as income and not capital gains.

No two GEBs are the same and due to different timescales, different payouts and while all are tied to stock market indexes these may be the FTSE All Share or the FTSE 100 etc. it is almost impossible to compare like for like.

GEBs may use an offshore subsidiary as guarantor but offshore tax havens will have different and usually sub-standard compensation schemes when compared to the UK.

Banks do go ‘bust’ and you get instances where companies such as Lehman's and TrackData who were heavily involved in GEBs left investors wondering if they would get any compensation.

Many Independent Financial Advisors (IFAs) refuse to recommend GEBs to their clients because while the GEBs might seem simple when initially presented the small print can be notoriously complex and difficult to understand.

If after considering the above your financial advisor suggests you invest in one you can be sure he will be receiving a hefty commission. Charges and commissions are where financial institutions make their money, so unless you understand it properly don´t buy the product.

date added: 13/03/2013

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