Guaranteed equity bonds are no guarantee

When stockmarkets start to look rocky, banks waste no time in touting schemes that offer protection from market falls - such as guaranteed equity bonds. But you should be wary, even if their terms are tempting.

When the stockmarket starts to look rocky, banks waste no time touting schemes that offer protection from market falls. So it's no surprise that the finance pages are full of adverts for guaranteed equity bonds (GEBs).

GEBs are all pretty similar. They run for a fixed term and are linked to the performance of equities, but they guarantee to return your capital in full if the market drops, says Paul Farrow in The Sunday Telegraph.

Now this seems like the best of both worlds, doesn't it? You cash in if the market rises, but don't lose out if it falls.

But GEBs are not all they seem and most people would do well to avoid them. The bonds are only linked to equities. They don't invest directly in the market, so you don't get any dividends. You might also get only part of any gain in share prices.

And while the guarantee is obviously a comfort, you would still lose money if the market dropped, because you get back only your original investment. If you take inflation into account at, say, 2.5%, your £100 would be worth only £92.60 after three years.

Most of the recent articles on GEBs fail to mention one of their most serious drawbacks: tax. The structure of some of the bonds means you have to pay income tax, rather than capital-gains tax, on any profits. Higher-rate taxpayers watch out!

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