Guide to Growth and Income Bonds

Guaranteed Income and Growth Bonds.

These are a guaranteed investment. On purchasing a bond the customer will know exactly what they will receive, which can be either specified income payments (Income Bond) or a specified maturity amount (Growth Bond). In addition to this they will also receive the return on their original capital investment

Common features:

Range of investment terms available (1 to 5 years).

Rates of return increase the higher the capital investment.

Rates of return can change daily (usually weekly).

Once the bond has been purchased the income payments or capital growth is fixed.

Rates of return are generally higher than bank and building society savings accounts, but lower than other bonds that do not provide guarantees removing any investment risk to the customer.

Cash in values are not guaranteed.

Income is paid out net of basic rate tax.

Risk profile

Providing the bond is held until the end of the investment term the returns are guaranteed. Therefore, there is no risk of losing any of the original capital investment.

Who wants a guaranteed Income / Growth Bond

Investors who want an income or capital growth and do not wish to take any investment risk.

This may be appropriate for investors who are approaching retirement or have already retired.

Short-term investors, especially those requiring a specified amount over a short investment term.

Investors requiring a known income level with no loss of capital.

Investors who do not want exposure in interest rate changes.

Balancing a portfolio for a customer who is predominantly in higher risk investments, especially where markets are volatile.

Investors wanting a known income with potential access to their original capital investment (not an annuity).

Higher Income / Guaranteed Equity Bonds

These bonds can be distinguished from truly Guaranteed Growth / Income Bonds in that the return on a Higher Income / Guaranteed Equity Bond is dependent on the performance of one or more stock market indices or basket of shares (these bonds are also regarded as Capital at Risk Bonds). There are many variations of these bonds and the returns are only paid providing certain conditions are met. Generally there is also a minimum and maximum limit on the returns a customer will receive. These bonds require careful assessment of the risk that the index the bond is linked to represents.

These bonds differ from Guaranteed Income and Growth Bonds because the income payments are guaranteed but the capital element is dependant on the performance of one or more stock market indices or basket of shares.

There are many variations of these bonds and they only achieve the advertised returns providing certain investment assumptions are met. These bonds require careful assessment as there is a risk that the indices or basket of shares may not achieve the performance required. If this happens the customer will not receive back all of their original capital investment.

Common features

Sold in blocks on a first come first served basis.

Each block has a sell by date and comes with a fixed term usually between 1 and 5 years. There is no customer choice

Rates of returns cannot be guaranteed because they are dependent on the performance of the index that the investment is linked to.

Income rates are fixed and although they are higher than Guaranteed Income Bonds, there is an investment risk to the original capital investment that is not present with the Guaranteed Income bond.

Cash in values and return of the original capital investment is not guaranteed.

Risk profile

The risk profile will depend on the index that the bond is linked to and the conditions that need to be met to receive the advertised returns. The indices are based on a basket of stocks that ensures there is a spread of assets underlying the investment. Different indices use different stocks and have historically shown different levels of volatility.

Opportunity areas

Those investors who are able to lock their investment away and will not need access to it, as well as accepting that there is some risk to their original capital investment. With some bonds this element of risk is greater that others and it could be that all capital may be lost under certain circumstances.

The Guaranteed Bond opportunities also apply here, but the risk of losing some or all of the original capital investment and the term of the offer must be acceptable to the customer and match their need.

With Profit Bonds

With Profit Bonds are generally open ended investments. The bonds are medium to long term investments where the investment term is expected to be at least 5 years. These bonds offer few, if any, guarantees with the actual return dependent upon the performance of the with profits fund the bond is linked to and the actual bonuses declared during the investment term.

Common features

No fixed investment term with bonuses declared annually.

The performance of a With Profit bond does not match the exact performance of the underlying investments.

The with profit bond provider smoothes the investment returns by declaring bonuses that reflect lower than actual market returns in good years and better than actual market returns in poor years.

The aim being to provide steady growth rather than following the ups and downs of the investment markets.

The annually declared bonus rate can rise or fall depending upon the product provider’s view of medium to long term investment conditions. Where favourable investment conditions have existed throughout the term a terminal bonus may be added when the bond ends.

Where investment conditions have not been favourable, most with profit bonds apply a market value adjuster that can reduce the amount paid.

The financial strength of the With Profits fund is important in determining whether the product provider will be able to continue to meet their past commitments and declare future bonuses.

Quoted rates of return are higher than for Guaranteed Bonds due to the lack of guarantees.

Risk profile

With Profit Funds are generally considered to be low to medium risk for the medium to long term investor. This is due to the smoothing effect of bonuses on investment returns. The investment returns are not guaranteed and the level of bonus declared can vary year on year. Bonus declarations are based on the profitability of the with profits fund and there is a wide spread of assets backing the underlying fund.

Opportunity areas

Medium to long term investors wanting smoothed growth rather than the volatility of stock market linked investments.

Those requiring steady but not guaranteed returns with long term growth potential.

Investors who are generally cautious about their investments but have funds to invest and are looking to beat the effects of inflation over the long term.

Higher rate taxpayers with no immediate need for cash who are looking for medium to long term tax efficient (tax deferred) investments.

Investors who want to take an income and are happy that the underlying value of their investment and the annual growth from the investment may vary.

Unit Linked Bonds

These are open ended bonds where the return is directly linked to the performance of underlying funds. The investment made is used to buy units in the underlying fund and the value of the bond increases or decreases as the value of the units change. The performance of these funds can be volatile and consequently there are no guarantees. Over the longer-term, equity linked investments have exceeded inflation but they should not be considered as a short term investment.

The performance of these funds can be volatile and consequently there are no guarantees. Over the longer-term, equity linked investments have exceeded inflation but they should not be considered as a short-term investment.

Common features

A wide choice of funds that the investment can be linked to and the ability to switch between funds.

There is no investment term and the unit prices are calculated daily.

The investment is invested in units after charges to cover administration costs have been deducted.

The underlying funds are invested by a Fund Manager, so that all policyholder returns are linked to the value of the pool of investments in the fund.

There are no guarantees on either level of income, capital growth, or the return of the original capital investment

Risk profile

Unit linked funds are generally medium to high risk over the long term. The volatility of the funds makes them unsuitable as short-term investments. The Investment can be transferred between funds so that it is possible to switch to low risk cash funds when the market is especially volatile or to reduce the exposure to the market when the bond approaches maturity. The Managed Fund has the largest spread of risk and the fund can be invested in a combination of equities, gilts, corporate bonds and property.

Opportunity areas

Unit linked bonds are suitable as longer term investments where the investor is prepared to accept an element of investment risk. The choice of funds can be matched to the investors risk profile.

Investors looking for an investment that over the long term can be expected to outperform inflation.

Higher rate taxpayers looking for tax efficient (tax deferred) investments.

Individuals who want to take an income and are happy that the underlying value of their investment and the annual growth from the investment may vary.

Most bonds carry some element of capital risk. If you are unsure about the risks involved, you should seek expert advice. If after seeking advice, you are still not entirely happy with every aspect of the product, you should not invest.

If you are considering investing in a product where you could lose some or all of the money you invest (your capital) read the Capital-at-risk products leaflet from the FSA first.

Please remember that Seymour Sinclair Investments do not make recommendations on any investment product and all business is carried out on an Execution Only basis as no advice is given.