High return, low risk - so where's the problem?
Never mind the critics, says Jane Suiter, guaranteed income bonds still look like a safe bet
Sunday 06 August 1995
If you can do without your money for at least a year, guaranteed income bonds pay a guaranteed rate of return on your investment and pay back all your money after a set period.
These bonds have taken a knocking in recent months, with the Chancellor, the Inland Revenue and even the regulators joining in. As a result, many of the big-name life offices are no longer offering them. But this does not mean they are in any way a dangerous investment.
The bonds are clear-cut and easy to understand. There are no extra charges, as the costs of setting up and running the bonds are included in the rate offered.
"Guaranteed income bonds are great for people who want peace of mind," says Graham Hooper, investment director at the independent adviser Chase de Vere. "They offer security of income. You know when it will arrive and exactly what you will get. Basically, what you see is what you get."
Mr Hooper recommends investing in unit trusts and PEPs for the long term, guaranteed income bonds for income and peace of mind, and the building society for short-term money.
However, the choice of bonds is far narrower than it was even a few months ago. Many leading life offices have stopped offering the product since the Inland Revenue changed the rules to make any gains on trading in gilt options liable to corporation tax. Previously they could be used to create tax-free gains.
Earlier this year, Scottish Widows took in more than pounds 330m for its guaranteed bonds. But it no longer has one on the market. David Graham, its marketing director, explains: "When interest rates fell and equity markets dropped in 1994, many people were looking for a safe way to get a higher return. We were able to offer them what they wanted. But when the Revenue changed its rules to tax gilts we could no longer do so profitably." Mr Graham says everyone who bought a Widows bond retains the full guarantees. "If there's a cost, we'll stand it."
To be able to offer the bonds profitably, a company needs to have expenses greater than its income in some part of its operations. It can offset these against tax, providing the extra needed to make the bonds worthwhile, Mr Hooper says.
As a result of the changes, many companies in the market are not household names. AIG is a big player, as are Financial Assurance and GAN Life & Pensions. But the guarantee is only as good as the company behind it. An independent adviser can guide you on the company's financial soundness.
Colin Jackson, joint managing director of the independent adviser Baronworth Investment Services, says the bonds are most suitable for basic-rate taxpayers. "Pensioners with money in the building society are usually getting a very low rate of return on their money. A return of 7.3 per cent after tax then looks very attractive." Higher rate taxpayers, he says, may prefer to consider corporate bond PEPs.
"Legal & General's PEP offers the same guarantees of return of capital after five and a half years, as well as guaranteed income. It is also tax-free, even for higher-rate taxpayers."
The best guaranteed income bonds pay out more than 7 per cent. However, Amanda Davidson, of the independent adviser Holden Meehan, is one of many independent financial advisers who recall the days when they could put clients into guaranteed income of more than 11 per cent.
Ms Davidson says the bonds are only a good idea if you think interest rates are going to remain at the same level or fall. If rates went up, you could find yourself being paid below the odds, she points out.
Some advisers also offer a "tailor-made" service that can cover irregular payments or arrange payouts on specific dates. In addition, such specialist companies as Manor Park (Guernsey) have entered the market. Its funds do not invest in gilts, so it can continue to operate this type of investment without fear of the Revenue.
The Guaranteed UK Accelerated Growth Fund offers a guaranteed return at the end of five years of the whole initial investment plus 200 per cent of the average increase in the FT-SE 100 index.
Of course, this means that the exact level of your income is not guaranteed, as with the other funds. But there is a possibility that it could be higher.
The best rate on offer at the moment from the traditional life offices over one year is 6 per cent from AIG Life, but the minimum investment is pounds 100,000. An investment of pounds 5,000 would pay out 5.7 per cent. Over five years, AIG will pay out 7.15 per cent a year, and the rate falls to 7 per cent over one year.
Income from the bonds is usually paid annually, but it can also be paid monthly or every six months.
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