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Kirk Rice Blog

Investing With GuaranteesWritten on April 27, 2016 by Peter Sharratt

Investing With Guarantees
Financial Services Questions

The Question:

Apart from my Pension I have never invested money before and with Interest Rates still remaining low I am beginning to realise that if I want to improve the return I need to consider investments.  I am reasonably cautious and would prefer something that at least Guarantees my capital.  Is this possible?

Peter Sharratt answers:

From 2000 to 2003 World Stock Markets fell 3 years in a row due to the TMT (Technology, Media, Telecom) Bubble bursting and 9/11.  In 2008/09, having had a recovery period, we saw further large falls due to the Banking Crisis following the collapse of Lehman’s.  Whilst both events were unusual they are a reminder that investments carry risk.  Understandably, such events make investors nervous, especially individuals such as yourself who are cautious and perhaps considering investment for the first time.

Fortunately, some product providers seem to be aware of this and we are now starting to see a number of products offering either Capital or Income Guarantees although as with any investment you need to be clear about how the product works and the risks you are taking.  These products are not risk free.  A Capital Guaranteed Product will typically guarantee a return of your Original Investment after a pre-agreed period; generally 6 years or more.  In addition, some will also lock in any growth achieved on the Anniversary and this will often be the revised value Guaranteed at maturity.  When the plan matures, you not only receive what you put in, there is also scope to receive some growth through prior lock-ins.   If the Actual Value is higher, then that is what you get back, if however it is lower you get the Guaranteed Value.

Some products will allow access to some or all of your capital during the term of the Investment but the Guarantee will then not normally apply and the value could be lower than the amount you originally invested.  There are downsides and these will vary from product to product.  Firstly, though the Guarantee is usually provided at extra cost, it is basically an insurance which you pay for.  The choice of Investment Funds will be limited and usually structured to be LOW to MODERATE in Risk, although it could be argued that this type of fund is ideal for someone who wants the reassurance of a Guarantee.  It does however mean the potential upside could be limited.  The Guarantee normally applies on a set date only; it does not apply on earlier encashment.  The Guarantee adds further reassurance, but at a cost, but as a first time investor it may be a cost worth paying.  As always, get advice; as I mentioned earlier, these are not risk free products.

Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875000 or email peter.sharratt@kirkrice.co.uk

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