A Guaranteed Equity Bond is a method of linking your investment to the stock market without the risk of losing any money if stock markets go down. They are sometimes referred to as 'Structured Products'.
Bonds are taken out for a particular length of time, such as three, four or five years, during which time withdrawals may or may not be allowed.
The returns are based on the performance of a defined investment index, such as the FTSE 100. The relevant index is made clear in the advertising for the bond. This is usually a percentage of the growth achieved over the relevant period and is paid in the form of interest. If the index falls during the period, you will receive back your original investment only.
Guaranteed Equity Bonds are suitable for people who want to have the possibility of growth that is linked to the stock market but without the risk of losing money.
The price you pay for the guarantee not to lose your money is that you may not benefit from the full amount of any stock market rises in the future. Some bonds do offer a return above the relevant stock market, but this is subject to a cap.
A bond paying a 20% return over three years (assuming the stock market doesn't fall) is not much more competitive than a deposit paying around 5.5% a year interest, which you would get regardless of stock market performance. However, in the present environment, this kind of return would be difficult to achieve with a cash savings account.
Guaranteed Equity Bonds are effectively deposit accounts, and as per the Personal Savings Allowance, interest payments are paid without tax being taken off. This means that up to £1,000 of savings interest can be earned each year without tax being due (up to £500 for higher rate taxpayers, with no allowance for additional rate taxpayers).
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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