Barclays Growthbuilder Plan any good?

The Barclays Growthbuilder plan, available until 1 June 2010, offers a potential return of up to 39.6% over a six year period.

The idea is fairly straightforward. You invest between £3,600 and £75,000 for six years and for each year the FTSE 100 Index is higher at the end of each year compared to the start of the year, 6.6% is added to your final return.

So, suppose you invest £10,000 and the FTSE 100 Index rises over three of the six years, you’d receive £10,000 x 6.6% x 3 = £1,980 plus the return of your original £10,000. If it falls every year you’ll simply get back your £10,000. The only scenario where you’d lose money is if Barclays Bank PLC, which underwrites the plan, fails to pay what’s owed to you at maturity – unlikely, but never say never. Should this happen you’ll be covered by the Financial Services Compensation Scheme up to £50,000 per person.

The plan can be held in an individual savings account (ISA). When held outside of an ISA any gains at maturity will be subject to capital gains tax.

While I applaud Barclays for keeping things simple, unlike some competitor plans, I have a major gripe with the Growthbuilder plan: the potential annual returns of 6.6% are not compounded, which effectively overstates returns when comparing to conventional savings. If we factor in compounding (i.e. interest on interest) then the 6.6% potential annual return falls to 5.73%.

Let’s take a look at the possible returns:

Number of years when FTSE 100 rises	Return on £10,000	Equivalent Gross Annual Compounded Return
0	£0	0%
1	£660	1.10%
2	£1,320	2.11%
3	£1,980	3.07%
4	£2,640	3.99%
5	£3,300	4.88%
6	£3,960	5.73%

Not very compelling are they? Especially when you can get 5% gross fixed for five years via a savings account. However, higher rate taxpayers could benefit from any returns being subject to capital gains tax and not income tax, although this obviously depend on tax rates and rules in six year’s time...difficult to predict!

Overall I think this plan offers a poor deal. The potential upside just doesn’t compensate for the added risk versus a fixed rate savings account. To get a worthwhile return the FTSE 100 will need to rise consistently over the next six years. And if you believe that will happen then probably better to invest in a tracker fund instead and benefit from the full extent of any rises plus dividends too.

Read the full review at http://www.candidmoney.com/candidreviews/review22.aspx