What is an Equity Bond?

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You may already be familiar with fixed term savings accounts (commonly referred to as ‘fixed rate bonds’ or ‘fixed term bonds’). These are accounts where you lock away your money for a set period of time and earn interest, but you usually can’t take the money out until the term ends.

An Equity Bond is similar. You lock your money away and get it back at the end of a fixed term. But there is one very important difference: A fixed term savings account will pay you a fixed amount of interest. However, with an Equity Bond, the payment of interest depends on the performance of the stock market. They usually offer the chance to earn a higher amount of interest than a fixed term savings account, but there is the risk that you earn no interest at all.

What are the key features of an Equity Bond?

• You have to subscribe before the term starts.

An Equity Bond will be open for applications during a specific period – usually around six weeks before the term starts. If you miss the application deadline, you will not be able to apply late, however, there may be a new Equity Bond available for you to apply for instead.

• You can only invest a lump sum.

You cannot add money to your investment once the term starts.

• They are meant to be held for a fixed period of time.

You will be expected to leave your money in the Equity Bond until the end of the fixed term. Most Equity Bonds allow you to withdraw your money early if you need to, but this could mean you get back a lot less than you put in. So, it’s really important that you only put money in an Equity Bond if you can afford to keep it tied up for the full term. You must also be comfortable with what would happen if you needed to withdraw your money unexpectedly or in an emergency.

• You won’t lose money if the stock market falls.

While the payment of interest depends on the performance of the stock market, this doesn’t mean you’ll lose money if the stock market falls. As long as you hold an Equity Bond for its full term, you should get back at least the amount you put in.

• They are covered by the Financial Services Compensation Scheme (FSCS).

The FSCS is a UK Government-backed scheme which offers compensation if you lose money because a company holding your money goes bust and can’t pay you back. However, there are some restrictions. The scheme only protects up to £85,000 per individual for the total sum of all accounts you hold at that bank or building society. You can find out more at fscs.org.uk.

• The interest can be tax-free if held as a Cash ISA.

Any interest you earn is subject to income tax, and the amount of tax you have to pay depends on your own personal status. However, you can use your Cash ISA allowance to put money in an Equity Bond and this means you will not need to pay income tax on any interest earned, provided you’re eligible to subscribe for an ISA.

What do I need to consider before putting money in an Equity Bond?

• You must be prepared to leave your money untouched for the full term, otherwise you may get back less than you put in.

• While the potential interest you can earn might be higher than a fixed rate bond, there is a risk that you’ll earn no interest at all.

• The interest you could receive will not be adjusted for inflation or interest rates during the term. If inflation and/or interest rates are high, your money will be able to buy less in the future than it does today.

• While your money is protected by the FSCS, there are limits on how much you can claim.

Equity Bonds can be rewarding for people who understand them – they give you the potential of stock market investing with the protection of savings. But, like any financial product, there are risks to consider. Visit vaultsavings.co.uk to find out more.