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Abbey Super Cash ISA 10%- Too Good to be True?

Personal_Finance / Savings Accounts Mar 16, 2008 - 06:34 AM GMT

By: Nadeem_Walayat

Personal_Finance Best Financial Markets Analysis ArticleAbbey have launched what on face value looks like an unbeatable market breaking Cash ISA savings account paying a remarkable 10% for up to 13 months on lump sum investments of up to£3,600 (from 6th April), but and there is a big BUT, savers also have to invest a lump sum into their Guaranteed Equity Bond GEB, which usually tend to prove to be very bad investments, therefore this article attempts to present an objective look at the Abbey product to determine whether or not it stacks up against other Cash ISA's such as the Barclays 12 month Tax Haven Cash ISA paying 6.5%. Both Cash ISA savings accounts are instant access.


Key points

  • Instant access cash ISA
  • 10% for 13 months AER
  • Allows transfers in from other ISA providers
  • Matching amount in GEB linked to the FTSE 100 Index

To get much more information, needs delving deep into abbeys terms and conditions than the main advertising pages such as
http://www.abbey-products.com/product/super-isa-squirrel/more/
Even for a trained eye the mish match of lumping various ISA details together in one document is confusing, http://www.abbey-products.com/product/super-isa-squirrel/assets/isa-terms.pdf, and the GEB document is not much better - http://www.abbey-products.com/product/super-isa-squirrel/assets/abbey-legal.pdf

Additional Key Points to add to the above are -

  • GEB Minimum term is 3.5 years
  • GEB Guarantee is only if held for the investment term, i.e. early redemptions could produce a loss.
  • GEB Minimum return is 6%
  • GEB Maximum is 50% of the average growth in the FTSE 100 index with the final level an average of the FTSE over the last 6months
1. FTSE 100 Index Falls Below initial Price on Maturity
Year Cash ISA Interest Return Year End GEB GEB Gain Return Year End Invest value Tot Return
Year 1
£ 3,000
10%
£ 300
£ 3,300
£ 3,000
0%
£ -
3000
£ 6,300
5.0%
Year 2
£ 3,300
4.75%
£ 157
£ 3,457
£ 3,000
0%
£ -
3000
£ 6,457
2.5%
Year 3
£ 3,457
4.75%
£ 164
£ 3,621
£ 3,000
0%
£ -
3000
£ 6,621
2.5%
Year 3.5
£ 3,621
2.38%
£ 86
£ 3,707
£ 3,000
6%
£ 180
3180
£ 6,887
4.0%

 

Total return Analysis
Initial Investment
£ 6,000
Value On Maturity
£ 6,887
Return
£ 887
Average return per year 4.2%

* Average rate is Total Return / 3.5 (Number of Years, and inclusive of compounding).

2. FTSE Index Rises to above 7000 in year 3 - 25% (average over last 6 months of investment term)
FTSE return is 50% of the gain of 25% therefore 12.5%
Year
Cash ISA
Interest
Return
Year End
GEB
GEB Gain
Return
Year End
Invest value
Tot Return
Year 1
£ 3,000
10%
£ 300
£ 3,300
£ 3,000
0%
£ -
3000
£ 6,300
5.0%
Year 2
£ 3,300
4.75%
£ 157
£ 3,457
£ 3,000
0%
£ -
3000
£ 6,457
2.5%
Year 3
£ 3,457
4.75%
£ 164
£ 3,621
£ 3,000
0%
£ -
3000
£ 6,621
2.5%
Year 3.5
£ 3,621
2.38%
£ 86
£ 3,707
£ 3,000
13%
£ 375
3375
£ 7,082
7.0%

 

Total return Analysis
Initial Investment
£ 6,000
Value On Maturity
£ 7,082
Return
£ 1,082
Average return per year
5.2%

 

3. FTSE Rises to above 8000 in year 3 - 40% (average over last 6 months of investment term)
FTSE return is 50% of the gain of 40% therefore 20%
Year
Cash ISA
Interest
Return
Year End
GEB
GEB Gain
Return
Year End
Invest value
Tot Return
Year 1
£ 3,000
10%
£ 300
£ 3,300
£ 3,000
0%
£ -
3000
£ 6,300
5.0%
Year 2
£ 3,300
4.75%
£ 157
£ 3,457
£ 3,000
0%
£ -
3000
£ 6,457
2.5%
Year 3
£ 3,457
4.75%
£ 164
£ 3,621
£ 3,000
0%
£ -
3000
£ 6,621
2.5%
Year 3.5
£ 3,621
2.38%
£ 86
£ 3,707
£ 3,000
20%
£ 600
3600
£ 7,307
10.4%

 

Total return Analysis
Initial Investment
£ 6,000
Value On Maturity
£ 7,307
Return
£ 1,307
Average return per year
6.2%

 

4. Halifax 4 year fixed rate cash ISA (adjusted for 3.5 year return) for Comparison
Year Cash ISA Interest Return Year End
Year 1
£ 6,000
6.20%
£ 372
£ 6,372
Year 2
£ 6,372
6.20%
£ 395
£ 6,767
Year 3
£ 6,767
6.20%
£ 420
£ 7,187
Year 3.5
£ 7,187
3.10%
£ 223
£ 7,409

 

Total return Analysis
Initial Investment
£ 6,000
Value On Maturity
£ 7,409
Return
£ 1,409
Average return per year 6.7%

 

Conclusion
Even if the stocks bull market takes off during the next 3 to 4 years, the Cash ISA / GEB bond combo would still FAIL to match the risk free Halifax 4 year fixed rate cash ISA. Therefore Abbey's Super ISA appears great for grabbing the headlines but on close inspection turns out to be a pretty poor choice.

Savers looking to invest for more than 3years are probably far better off going for a fixed rate risk free option such as the Halifax 4 year cash ISA, rather than to speculate on these Cash/GEB Splits that don't stand up to analysis.

By Nadeem Walayat

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Attention Editors and Publishers! - You have permission to republish THIS article if published in its entirety, including attribution to the author and links back to the http://www.marketoracle.co.uk . Please send an email to republish@marketoracle.co.uk, to include a link to the published article.

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