Guaranteed Investment Bonds reviewed
Guaranteed investment bonds offer exposure to equities and the potential of increased returns while also providing a “safety net”. They do this by offering a guaranteed capital sum either at a specific date or on death. Volatility is a major risk for investors who need access to their capital in the short term- particularly elderly clients.
Currently there are four investment bond products on the market which offer guarantees to invested capital whilst giving growth potential.
1. Aegon Secure Capital Investment Bond
The Aegon Secure Capital bond provides a guaranteed future capital value and a death benefit guarantee. The guarantee allows investors to lock-in growth on an annual basis. Providing no additional withdrawals were made the product would guarantee a minimum fund value of 100% of the original investment at the end of a selected capital guarantee term – this can be from 10 years to 20 years – while potentially benefiting from any growth. At the end of this term (not before or after) your fund will be at least equal to 100% of the original premium – even if markets fall – excluding any withdrawals.
Capital escalator feature
The capital escalator provides regular fund reviews and locks in investment growth. This lock-in amount then becomes the minimum from which income or capital guarantees are calculated.
When you first invest in the bond, the guaranteed capital value is set equal to the original premium. Until the end of the guaranteed term, you can protect the original amount invested from market downturns. Equally the capital escalator feature allows the fund to rise if markets go up.
The bond is reviewed yearly, on the anniversary and if it has risen in value compared to the previous guaranteed capital value amount, the new guaranteed capital value is locked in and will never go down (excluding any withdrawals you take). This “ratcheting up” means in future years the guaranteed capital could keep increasing.
The guaranteed capital value could increase, with no cap set on the maximum growth, but would never decrease unless withdrawals were taken, in which case the capital guarantee would be reduced proportionately.
Guaranteed capital and guaranteed death benefit
You can select a guaranteed death benefit, which allows you to pass on the original premium amount to the beneficiaries. This benefit is payable on the date the last life assured dies.
If you select the guaranteed death benefit, until the end of the guaranteed capital term, a lump sum will be payable on the death of the last life assured equal to the higher of:
▪ 100.1% of the fund value of your bond
▪ the guaranteed capital value, at the previous bond anniversary, proportionately reduced by any withdrawals taken and adviser charges paid since the previous bond anniversary.
After the end of the guaranteed capital term, the death benefit is 100.1% of the fund value only.
If you do not select the guaranteed death benefit, the death benefit on the bond will be 100.1% of the fund value throughout the lifetime of the bond.
There are six different investment portfolios and a UK Cash fund to choose from. You can invest in either “core” or “multi-manager” portfolios. The fund ranges available with Aegon Secure Capital are:
- “Managed Risk” Portfolios – there are 3 available funds.
- “Core Portfolios” – there are 3 available funds.
- UK Cash fundManaged Risk Portfolios – the risk is managed as market conditions change by altering the asset allocation within the fund. Black Rock manage these portfolios and they can increase the proportion of lower risk assets when market conditions are volatile and increase the amount of higher risk assets when market conditions improve.Core Portfolios – these offer investors a targeted split between fixed interest and equities regardless of the associated risk levels.
- You can invest in more than one Managed Risk Portfolio or Core Portfolio at any point, as well as investing in a UK Cash fund.
Withdrawals (including adviser charges)
Taking withdrawals from the bond will reduce the future guaranteed capital value and guaranteed death benefit proportionately. For example, if you take withdrawals of 10% of the fund value, the guarantees would reduce by 10%.
Cashing in the bond
You can cash in your bond at any time. If you do this Aegon will cancel all the guarantees and you may get back less than your original premium.
2. Liverpool Victoria Flexible Guarantee Bond
The Liverpool Victoria Flexible Guarantee bond offers access to the Cautious (Series 3) Fund which provides the potential for steady growth with reduced risk to capital. It is mainly invested in fixed interest securities with the balance in equities and property and some in cash. You can add a guarantee of between 8 and 10 years. This guarantee ensures that at the end of the chosen term the bond will be worth at least the same as the amount originally invested, less any money paid out during the guarantee term and any on-going adviser charges.
The guarantee can be purchased at outset and at any point during the lifetime of the bond and can be useful in securing gains since you can buy another guarantee period as soon as one ends.
For example, if you invested £30,000 with an 8 year guarantee and the fund grew to £40,000 at the end of the 8 years, you could buy another guarantee to lock the gains in. This gives you stability for the future value of the fund, while still being able to benefit from future growth. Please note that you could also still get back less than you invested if you cash in the bond before the end of the guarantee period or after. The cost of the guarantee is 1.4% a year for the duration of the guarantee.
The fund uses averaging to smooth volatility. After 26 weeks of being invested in the fund, LV= protects the investment from market fluctuations by averaging the value of the assets over the previous 26 weeks. You can switch fund options at any time. Three switches are free in any bond year and then a £25 charge will be applied to further switches.
LV= operate a mutual bonus scheme, designed to reward qualifying members. It increases the amount LV pays to an investor when they decide to fully cash in their bond, if they die or become terminally ill and it is paid in addition to the normal returns applied to the bond. This mutual bonus is discretionary and may not be declared every year. In exceptional circumstances it could be reduced or taken away.
Guaranteed death benefit
The death benefit payable will be 101% of the value of the fund. Any mutual bonus applying to the bond will be added to this amount.
• It has a smoothing mechanism which protects your investment from short-term volatility in the market, giving a more consistent return.
• For lives up to and including age 79 at outset, it has a guaranteed minimum death benefit built in at no extra cost.
• There is the potential for a mutual bonus to be added on addition to normal fund returns.
Loyalty Discount (Life and Pension):
(years) AMC loyalty discount (pa)
Liverpool Victoria Friendly Society Limited has been awarded a rating of B+ (very strong) for overall financial strength by AKG (AKG Company Profile & Financial Strength Report, December 2016).
The Cautious Series 3 fund is part of the main LV with-profits fund which is rated 10/10 for financial strength, investment freedom, and flexibility and bonus-paying ability (Source: Cazalet Consulting With Profits Ratings, May 2014)
3. PruFund Protected Growth
This fund aims to maximise growth over the medium to long term while helping to smooth the peaks and troughs of investment performance. The fund invests in many different types of investments and asset types including UK and international shares (equities), cash, property and fixed investment securities such as government gilts. It protects you against some of the ups and downs associated with investing directly in the stock market by using a “smoothing” mechanism to provide a smoothed return over the medium to long term.
On each quarter date, an “Expected Growth Rate (EGR)” is set, based on the Prudential’s expectations of the long-term investment return on the assets of the fund. The unit price for each fund will normally increase daily in line with the appropriate EGR. For example, if the unit price of a PruFund fund was 100p at the start of the investment and the EGR was 6%, then after one year the unit price would be 106p. This assumes the EGR remains at 6% for the year and there are no Unit Price Adjustments or suspension of smoothing.
Every day, both the unit price, which normally increases each day by the EGR, and the “unsmoothed price”, which is the value of units in the fund are monitored and the smoothing process checks the gap between the two. If this gap is 10% or more, in either direction, the smoothed price is adjusted to reduce the gap to 2.5%. For example, if the unit price was 100p and the unsmoothed price 112p, there would be a gap of 12%. The unit price would then be adjusted to 109.2p, which is 2.5% below 112p.
Similarly, if the unit price was 100p and the unsmoothed price 88p, there would be a gap of 12% in the other direction. The unit price would then be adjusted to 90.2p, which is 2.5% above 88p. If the gap is less than 10%, the unit price normally remains as it is.
Additional monitoring of the unit prices is conducted quarterly. If there is a gap of 5% or more between the unit price and the unsmoothed price for that day, the unit price is halved until the gap is less than 5%. If necessary, this is done repeatedly until the gap is less than 5%. After any change, the unit price will continue to increase by the Expected Growth Rate. For example if, at the quarter date, the unit price was 106p and the unsmoothed price 100p, there would be a gap of 6%. The unit price would be reduced to 103p. Similarly, if, at the quarter date, the unit price was 100p and the unsmoothed price 108p, there would be a gap of 8% in the other direction. The unit price would be increased to 104p.
There may be occasions when the smoothing process is suspended. For instance, if unusually large volumes of money enter or leave the funds. When this happens, your investment in the fund will rise or fall in line with the unsmoothed price until the smoothing process is reinstated.
A PruFund Protected Fund guarantee ensures that at the end of your selected guarantee term, your fund value will be worth at least the amount you invested (adjusted for any on-going or ad hoc adviser charges, withdrawals or switches out). On the Guarantee Date, any necessary adjustments are made and your investment will be switched into the relevant non-protected PruFund fund. This is the same fund and managed in the same way as the fund you had invested in without the guarantee and no guarantee charge. To add the guarantee costs 0.50% each year and this is paid for by deducting units within the plan.