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Legal & General Stock Market Linked Savings Bond

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I have come across a Nationwide/L&G combination product, and I would like some advice about it: Nationwide/Legal & General Stock Market Linked Savings Bond.

Basically, you invest at least £3,000 with Nationwide, and you can then invest at least £9,000 with L&G's Stock Market Linked Savings Bond. The former has a 12-month duration, but the latter is a 6-year commitment. Apparently you can't lose your original investment ( ... or can you?), and your gains are based on the stock market's performance.

Does anyone on HPC have one of these packages? I would appreciate advice from anyone! :)

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I have come across a Nationwide/L&G combination product, and I would like some advice about it: Nationwide/Legal & General Stock Market Linked Savings Bond.

Basically, you invest at least £3,000 with Nationwide, and you can then invest at least £9,000 with L&G's Stock Market Linked Savings Bond. The former has a 12-month duration, but the latter is a 6-year commitment. Apparently you can't lose your original investment ( ... or can you?), and your gains are based on the stock market's performance.

Does anyone on HPC have one of these packages? I would appreciate advice from anyone! :)

These sorts of things appeared just before the 2000/1 stock market crash. Basically, they believe the market is going down, invest it in something secure, keep the interest and at the end of 6 years give you back your capital...or am I being too cynical?

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Basically, you invest at least £3,000 with Nationwide, and you can then invest at least £9,000 with L&G's Stock Market Linked Savings Bond. The former has a 12-month duration, but the latter is a 6-year commitment. Apparently you can't lose your original investment ( ... or can you?), and your gains are based on the stock market's performance.

These are complex investment products, which are relatively expensive, and rarely good value - although they are marketed in such a way, that they look safe.

Essentially, they work by investing your money in the stock market, at the same time they buy a type of derivative called a put option (which, in effect, is an insurance policy that pays out if the stock market goes down). In order to cover the costs of the derivative (which must be paid for up front) they take out a loan, and use the dividend income from the stock investment to make the payments.

As you can see, this is a complex product - one of the big advantages of stock market investments is a dividend income stream (which in the case of the FTSE 100 is particularly generous, at something like 3%), in addition to the capital gains and inflation linking that stock investments can bring you. In this product, you lose the dividend income, as the cost of the insurance.

Depending on how much the insurance costs, you may not get 100% of your stock market capital gains either. The price of insurance varies depending on stock market volatility - so the expected dividend income may not cover the costs. So, the fund manager may choose to shave off some capital gains to pay part of the insurance cost.

Finally, the insurance has a fixed term when it is taken out, and there may be substantial costs to cancel the insurance. As a result, there are often very high penalty fees, if something happens and you do need to tap into this money.

To really understand what you are getting into, you need to read the small print very carefully, and weigh up what happens in a variety of different scenarios. You should also consider tax implications - would a simpler investment in a tax-sheltered account (like a shares ISA) be better than this type of investment (which can't be tax sheltered). Finally, what happens if the counterparty to the derivative can't pay (like AIG couldn't make the payouts on its insurance derivatives). This would be a fairly unlikely event, as the derivative will be underwritten by a major bank - but these are worrying times, and there's no guarantee that the banks could be bailed out again (the type of derivative used here, a put option, can be designed in such a way as to be 100% safe for the buyer of the insurance - but often, big 'professional' products aren't structured this way, so you can't rely on this type of design being used).

You should also consider the performance of the investment in different circumstances: In effect, you're going to be paying around 20% of your initial outlay (in lost dividends). Do you think that cost is worth the risk of the stock market dropping over then next 6 years? How likely is it to drop by more than 20% and not recover - especially with inflation running high? These are questions you need to ask before buying such a product.

In summary, these are complex products with stock, derivative and financing components to them. They are inflexible (you can't drip feed into them) and fixed term (you can't pull out early). By using your dividend income, for both management fees and for purchase of the derivative, the true management fees are obscured (usually because they are eye-wateringly large and represent poor value for money).

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These are complex investment products, which are relatively expensive, and rarely good value - although they are marketed in such a way, that they look safe.

Essentially, they work by investing your money in the stock market, at the same time they buy a type of derivative called a put option (which, in effect, is an insurance policy that pays out if the stock market goes down). In order to cover the costs of the derivative (which must be paid for up front) they take out a loan, and use the dividend income from the stock investment to make the payments.

As you can see, this is a complex product - one of the big advantages of stock market investments is a dividend income stream (which in the case of the FTSE 100 is particularly generous, at something like 3%), in addition to the capital gains and inflation linking that stock investments can bring you. In this product, you lose the dividend income, as the cost of the insurance.

Depending on how much the insurance costs, you may not get 100% of your stock market capital gains either. The price of insurance varies depending on stock market volatility - so the expected dividend income may not cover the costs. So, the fund manager may choose to shave off some capital gains to pay part of the insurance cost.

Finally, the insurance has a fixed term when it is taken out, and there may be substantial costs to cancel the insurance. As a result, there are often very high penalty fees, if something happens and you do need to tap into this money.

To really understand what you are getting into, you need to read the small print very carefully, and weigh up what happens in a variety of different scenarios. You should also consider tax implications - would a simpler investment in a tax-sheltered account (like a shares ISA) be better than this type of investment (which can't be tax sheltered). Finally, what happens if the counterparty to the derivative can't pay (like AIG couldn't make the payouts on its insurance derivatives). This would be a fairly unlikely event, as the derivative will be underwritten by a major bank - but these are worrying times, and there's no guarantee that the banks could be bailed out again (the type of derivative used here, a put option, can be designed in such a way as to be 100% safe for the buyer of the insurance - but often, big 'professional' products aren't structured this way, so you can't rely on this type of design being used).

You should also consider the performance of the investment in different circumstances: In effect, you're going to be paying around 20% of your initial outlay (in lost dividends). Do you think that cost is worth the risk of the stock market dropping over then next 6 years? How likely is it to drop by more than 20% and not recover - especially with inflation running high? These are questions you need to ask before buying such a product.

In summary, these are complex products with stock, derivative and financing components to them. They are inflexible (you can't drip feed into them) and fixed term (you can't pull out early). By using your dividend income, for both management fees and for purchase of the derivative, the true management fees are obscured (usually because they are eye-wateringly large and represent poor value for money).

Thank you for such detailed information! :)

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Guest anorthosite

These sorts of things appeared just before the 2000/1 stock market crash. Basically, they believe the market is going down, invest it in something secure, keep the interest and at the end of 6 years give you back your capital...or am I being too cynical?

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  • 144 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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