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Oliver Roylance-Smith — Head of Savings and Investments

How the Bank of England interest rate hike could affect you

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Last month, the Bank of England raised their base rate for the first time in more than ten years, and by doing so opened the door to increased monthly costs for many homeowners. What’s more, at the time of writing inflation continues to sit at a five year high of 3%, which means that the cost of living has more than trebled in the last 12 months. These two factors alone combine to create additional strains on the average UK household, and a situation which may influence some to reconsider their financial position. We take a look at what the latest Bank of England base rate and inflation might mean if you are looking to re-think your savings and investments.

Inflation

UK inflation, as measured by the Consumer Price Index (CPI), remained at its five year high of 3% for the second month in a row, according to the latest report released by the Office of National Statistics. And despite this being a full one per cent over the Bank of England’s target of 2%, it is also widely predicted that inflation will increase again before the year’s end.

Base Interest Rate Hike

Approximately 15 months after cutting their base rate of interest to emergency levels, the Bank of England’s Monetary Policy Committee voted on November 2nd to increase the interest rate from 0.25% to 0.5%. The move represents the first increase for ten years and has had a knock-on effect with homeowners, as a number of high street banks have since increased their standard variable and tracker rates, thereby increasing the cost of living for many.

No doubt we will see more lenders follow suit this month, and the combination of increased mortgage interest rates and high inflation means less disposable income for households, making it harder for the average UK household to make ends meet, let alone put enough money into their savings.

Not Passed On To Savings Accounts

There was a general consensus among economists that the Bank of England would raise their base rate before the end of the year, and so even before the Monetary Policy Committee voted in favour, there had been much discussion on both the advantages and disadvantages of a potential increase.

The most common advantage given in support of an interest rate hike was that it would likely increase the savings rates offered by banks, a welcome change for savers who have had to face year after year of some of the lowest savings rates on record. Unfortunately, although banks have been quick to raise their mortgage interest rates following the hike, the majority of banks have not done the same for their savings accounts – a real ‘lose / lose’ for both borrowers and savers alike.

Savings Accounts At A Glance

Savings rates therefore continue to under-deliver. A review by Simply Savings of the savings rates currently on offer shows rates of around 1.30% AER on instant access; 1.80% AER and 2.05% AER for one and two-year fixed rates respectively, around 2.25% AER for a three-year fixed rate and 2.37% AER if you fix for five years. Therefore, savings accounts do not come close to matching inflation, let alone beating it, meaning savers are still losing money in real terms, even if you are able to tie your money up for five years.

Compare best buys at Simply Savings »

Do your homework

Whenever considering changing strategy, it is important to do your homework. This means comparing the amount of interest you already receive with what is currently available in the market. If you are not receiving anything close to the above rates, a change may be worthwhile, and remember, despite the fact that savings accounts do not provide rates that counter the effects of inflation, they do offer full capital protection.

If you are not prepared to take on more risk to potentially access higher interest rates, then there are not many alternatives available on the market.

Taking On Risk Or Losing Money In Real Terms

For the entire time that the interest paid on your savings is less than the prevailing rate of inflation (and that’s after any tax has been taken into account), the value of your money is going down in real terms, and the longer this goes on, the more an impact it will have. It may well therefore be time to start re-evaluating your strategy when it comes to savings, as you would have to receive a significant return in the current climate just to match inflation.

With the added financial pressure brought about due to higher inflation, it may force us to consider investing in order to try and keep up with the cost of living. We are then faced with the conundrum of whether to take on more risk in order to achieve potentially higher returns, versus record low interest rates but without the risk to our capital.

Capital at Risk Products

Capital at risk investment plans offer a defined return for a defined level of risk. Combined with a fixed or maximum term, they therefore offer potential investors a clear trade-off between risk and reward, hereby enabling them to be compared with alternative options.

When you invest in a capital at risk investment plan, although your capital is not directly invested into the stock market, their returns are generally linked to the performance of the FTSE 100 Index (‘FTSE’ or ‘Index’). The returns for a capital at risk product are often dependent on whether the FTSE stays or ends above a certain level, for example a fix growth or income payment provided the FTSE ends a plan year higher than its value at the start of the plan.

Income Investment Plan Example

An example of one of the most popular income investment plans is the FTSE 100 Defensive Income Plan from Investec Bank, which provides investors with the opportunity to receive 7.25% interest each year provided the FTSE has not fallen by 20% or more at the end of each quarter. The plan has a second investment option offering 5.50% per year provided the FTSE does not fall by 40% or more.

Unlike deposit based savings products, this plan puts your capital at risk and if the FTSE has fallen by more than 40% at the end of the six-year term, you could lose some or all of your initial capital. Also, since it is an investment rather than a deposit-based plan, your initial capital is not covered by the Financial Services Compensation Scheme for default.

Click here to find out more about the Defensive Income Plan »

Risk v Reward

As with any investment, it is important to give full consideration of the risk versus reward on offer. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe, and then consider whether you are prepared to accept the level of risk to your capital in return for either a higher fixed rate, or the potential for a higher variable income.

In the example above, the potential income on offer is either 5.50% or 7.25% depending on how much the FTSE can fall each quarter. The best fixed rate on offer over a similar timeframe is in the region of 2.50%, so one of the questions to ask is whether the ability to receive around 2 to 3 times more interest is sufficient potential reward for putting your capital at risk if the FTSE falls 40% or more?

Conclusion

There is little doubt that higher inflation and an increase in the Bank of England’s interest rate has put increasing financial pressure on households in the UK. With a reduction in the amount of disposable income for many, uncertainty around future wage growth and no direct uplift in savings rates, one could argue that for those with mortgages, unless you can secure a savings rate higher than your mortgage rate, you should be paying off your mortgage as a priority, unless there are higher interest rates being paid on other debt such as credit cards, etc. which should be paid down first.

Although savings accounts do offer protection to your capital, since the banks have not passed on the interest rate rise to their savings accounts, the interest paid is likely to fall well short of inflation. Therefore, the fact that savers are losing money in real terms is a harsh reality of where we are right now, with some uncertainty of what this may look like in the coming months and years.

For those looking to secure a higher level of income and/or growth over and above the rise in the cost of living, then investing may be the only option since there are no savings products paying anything close to the current rate of inflation. You may want to explore the investment plans we have on offer, as they may provide the opportunity for returns to counter the adverse effect of inflation. However, if you are looking to invest in a plan, it is important to do you research, and make sure you fully understand the risks involved before putting your capital at risk.

 

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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. ISA transfer charges may apply, please check with your provider.

The investment plans referred to in this article are structured investment plans that put your capital at risk and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.

Investment Focus: Meteor FTSE Monthly Contingent Income Plan

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Is inflation really a factor when deciding what level of income you would like to achieve from your capital? Or perhaps it is the combination of the potential income and the possibility of any capital growth or decline in value that is our benchmark? Either way, how much income an investment might generate, when you might get paid, and the potential risk to your capital, would seem to be the obvious considerations when assessing any sort of income producing investment. And whilst inflation remains at a five year high of 3%, it is likely that if it wasn’t on your radar already, it is now.

Against this challenging economic environment, we take a look at the latest edition of Meteor’s FTSE Monthly Contingent Income Plan, which offers the potential to receive a high level of income that could counter the adverse effects of inflation over the medium term.

Plan summary

The new Meteor FTSE Monthly Contingent Income Plan gives investors the chance to receive a monthly income of up to 0.5%, which equates to 6.0% annual interest. Investors receive the opportunity for income payments each month, and the plan has a fixed term of 10 years. Although the plan is designed to continue for the full 10 years, it also has the ability to mature before the full term (known as ‘kicking out’) at the end of each quarter from the 18th month of the plan onwards.

FTSE linked

The plan has the potential to provide 6.0% interest each year, but whether an income payment is made or not is dependent on the performance of the FTSE 100 Index (‘the Index’ or ‘the FTSE’). In addition to the level of income achieved, the performance of the FTSE also determines the treatment of your initial capital at the end of the investment term.

The FTSE 100 Index tracks the share prices of the 100 largest companies listed on the London Stock Exchange, and is widely recognised as the proxy benchmark for most investment managers, especially those investing predominantly in UK equities.

Potential for high interest

The latest version of the plan offers investors the opportunity to receive a monthly return of 0.5% (6.0% annually), provided the value of the FTSE 100 Index at the end of the month has not fallen by more than 25% below its level at the start of the plan. Therefore, provided the FTSE stays at or above 75% of its starting level for the entire year, then the annual return on the investment would 6.0%, which is double the current rate of inflation.

For those with a more defensive view of what might happen to the FTSE in the coming years, the plans offers a second investment option which pays up to 5.25% each year provided the FTSE does not fall by more than 35% at the end of each month.

Some capital protection from a falling market

In addition to the amount of income paid, the treatment of the investor’s original capital is also dependent on the performance of the FTSE, and so this investment puts your capital at risk. The plan does offer some capital protection from a falling market since your initial investment will only be reduced if, at the end of the plan, the FTSE has dropped by more than 40% below its value at the start of the plan.

Therefore, the FTSE could fall by up to 40% of its starting value and the invested capital will still be returned in full. But if the FTSE falls by more than this, the invested capital is reduced by 1% for each 1% fall. For example, if the FTSE fell by 41% then the investor would lose 41% of their capital. You should therefore only consider this investment if you are prepared to lose some or all of your initial investment.

Kick out (early maturity)

Although the plan has a maximum term of 10 years, after 18 months it has the ability to “kick out” or mature early every quarter. This feature is also dependent on the performance of the FTSE, as the plan will only mature early if the Index has risen by 5% or more above its value at the start of the plan. In the event that the plan does mature early, the initial investment is returned in full along with a final monthly income payment, at which point the plan comes to an end.

Monthly Payments

The plan offers the potential for an income payment each month, dependent on the closing level of the FTSE on the relevant monthly measurement date. The monthly return of 0.5% will be paid to the investor if the Index is at or above 75% of its level at the start of the plan. Therefore, the FTSE can fall up to 25% and income will still be paid. If the FTSE falls more than 25%, no income is paid for that month, and the next opportunity to receive income would be the next monthly measurement date.

Defined risk and defined returns

One of the reasons investment plans such as these are popular with our investors, is that the potential returns are stated up front, whilst the investor also knows at the outset in what circumstances their capital is at risk. These defined returns for a defined level of risk, allow potential investors to weigh up whether they are prepared to put their capital at risk in return for the potential monthly interest on offer.

ISA friendly

As well as non-ISA investments, this income investment is available as a new ISA up to the current limit of £20,000, and also accepts transfers from both Cash ISAs and Stocks & Shares ISAs.

Fair Investment conclusion

Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With inflation rapidly becoming a thorn in every investor’s side, not least those seeking an income from their capital, the ability to achieve up to twice the current rate of inflation, even if the FTSE falls up to 25%, is certainly worth a closer look. Combined with some capital protection against a falling stock market, and the defined returns, defined risk on offer could be appealing for a wide range of investors.”

Click here to view the Meteor FTSE Monthly Contingent Income Plan »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. ISA transfer charges may apply, please check with your provider.

This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.

How to tackle inflation with your savings and investment strategy

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The latest figures reported by the Office for National Statistics show that inflation reached a five year high of 3% in the 12 months to the end of September. This rate is 1% above the Bank of England’s target and is likely to continue to rise, as the Bank predicts that inflation will likely reach 3.2% when October’s figures are released later this month. This rapid rise in the level of inflation has also contributed to the Bank of England raising their base interest rate for the first time in 10 years, from 0.25% to 0.5%.

Increasing inflation and interest rate hikes can be a dangerous combination, and as the cost of living for many will rise, so we will also start to ask more of our capital than we have done for some time. The increased demand for more income and/or capital growth may make investors evaluate their financial position and review their savings and investment portfolio. So here we take a look at some of the main factors to consider when considering a change of strategy.

Savings and Investment Strategy

Whether you have just started saving, or you already have an amount of capital built up over the years, it is understood that spreading your money across a number of different areas and products in order to diversify your risk, is a better strategy than putting all your eggs in one basket. A mixture of instant access, fixed rate bonds and investment plans may therefore provide a useful framework for a savings and investment strategy.

Instant Access

For many savers and investors, putting a percentage of their capital into an instant access account may be an essential part of a diversified portfolio. These accounts normally provide a variable rate of interest (which may or may not include an introductory bonus) and usually offer unlimited withdrawals, which can be made without the need to give any notice period. One of the advantages of an instant access account is that your capital is not at risk, and this is one of the main reasons these accounts are used, with most accounts also falling within the FSCS.

Although this combination of flexibility and capital protection are attractive features, it should be noted that the best instant access account interest rates on the market, such as the 1.30% AER variable from RCI Bank’s Freedom Savings Account, are still significantly below the rate of inflation. Indeed, at 3.0% this account doesn’t even pay half the prevailing rate.

Fixed rate bonds

A fixed rate bond is an account where your capital is locked away for a set period of time, during which you are not able to access your cash. The term is known and selected at the outset, and is normally in the range of one to five years. For many years, fixed rate bonds were the corner stone of many saver’s cash portfolio.

In return for tying up your money, fixed rate bonds usually offer the saver higher interest rates than are generally on offer from instant access accounts, for example, Vanquis Bank’s 5 Year Fixed Rate Bond is currently paying 2.40% AER fixed. Since the rate is fixed, it is a guaranteed not to change for the term of the bond, whilst some bonds also allow you to choose the frequency of your interest payment, for example monthly or annually.

However, it is also important to note that even the best fixed rate bonds on the market do not provide interest rates higher than 2.5%. Therefore, with inflation currently running at 3.0%, even a long term commitment of five years would fail to allow the value of your money to keep up with the rise in the cost of living.

Cash falling short

Instant access and Fixed Rate Bonds are both cash accounts, which means that your capital is protected and returned in full when you either transfer your instant access account, or your fixed rate bond comes to the end of its term. The only risk to you not receiving your capital back is that the bank becomes insolvent, although most of these accounts are covered by the UK FSCS or a European equivalent.

However, we have also revealed that based on the current rate of 3% inflation, none of these accounts beat inflation, and so there is the additional risk with cash in that your money is losing value in real terms. Cash therefore is not without its own risks.

Investment Plans

As you can see, long gone are the days where cash products alone can generate enough interest and income for savers to effectively grow their capital whilst hedging against inflation. In an attempt to replicate some of the returns of yester-year, more and more savers are having to consider  taking on more risk. One way  to access potentially higher returns is by investing in Investment plans.

This type of plan offers a defined return (either an income, fixed or variable, or capital growth), for a defined level of risk (normally aligned to the performance of an underlying stock market index, e.g. the FTSE 100 Index.

Investment plan features

One of the main reasons for considering an investment is the potential for the attractive headline rates on offer. There are a wide range  of investment plans to choose from in today’s market and all of them  aim to provide the investor with the opportunity to access returns higher than the current rate of inflation. Two popular examples of income investment plans are the Investec FTSE 100 Defensive Income Plan offering investors with 7.25% annual income, and Investec’s FTSE 100 Enhanced Income Plan paying a fixed income of 4.35% per year. These plans normally have a term of between 5 and 10 years which is known at the outset, prior to investing.

A feature which is unique to investment plans is that they offer conditional capital protection. This means that your capital is returned at the end of the term unless the underlying investment, usually the FTSE 100 index, falls by more than fixed percentage below its value at the start of the plan. This percentage is normally in the region of 30% to 50% and so investors may still receive a full return of their capital even if the market falls up to 50%. However, if the Index has fallen below the fixed percentage, you will lose the amount the Index has fallen, so you could lose some or all of your initial investment.

Savings and Investment Portfolio Example

In this example we take a product from each of the three areas covered above (instant access, fixed rate bond and investment plans) to show you how a combination of cash and investment plans can keep your capital producing income which is in line with the current rate of 3.0% inflation. Targeting a five-year timeframe, based on a savings and investment portfolio of £100,000, the capital is split as follows:

  • £15,000 into RCI Bank’s Freedom Savings Account, paying 1.30% AER variable
  • £45,000 into Vanquis Bank’s Five Year Fixed Rate Bond, paying 2.40% AER fixed for five years
  • £40,000 into Investec’s FTSE 100 Enhanced Income Plan, paying 4.35% p.a. fixed for five years

RCI Bank and Vanquis Bank both have a monthly income option, whilst Investec’s plan pays monthly as well. RCI’s Freedom Savings Account has no fixed term whilst the other two both have a fixed term of five years.

Income achieved

Based on the above investments, the cash part of the portfolio would achieve £1,275 per year (£160.25 per month). The investment part of the portfolio would achieve £1,740 per year (£145 per month) and would be fixed for five years.

Combined, this equates to £3,015 per year (3.015% yield) or £251.25 per month, most of which would be fixed for five years except the £195 from the instant access account which could go up or down over the next five years, although you should note that any changes to the RCI Bank rate are passed on to existing customers as well as new customers. By comparison, if the investor placed all of the £100,000 into the RCI instant access account, they would only receive £1,300 per year in interest.

Treatment of capital

£60,000 would be in cash based savings accounts, with Vanquis Bank deposits eligible for the UK’s FSCS protection up to the £85,000 limit, whilst deposits held with RCI Bank are eligible for the French deposit protection scheme (the FGDR), which protects the first €100,000 per customer.

The Investec plan puts your capital at risk, with a return of your initial £40,000 dependent on the performance of the FTSE 100 Index. Your capital is returned at the end of the five years unless the FTSE has fallen by more than 40% from its value at the start of the plan. If it has, your initial capital will be reduced by 1% for each 1% fall – therefore you could lose some or all of your original £40,000 investment.

In conclusion

The above savings and investment example combines cash and investment products to give an annual yield of just over 3%, the majority of which (85%) is fixed for five years, thereby offering a high degree of predictable income of a fixed timeframe. 60% of the portfolio is in cash and so is capital protected, whilst 40% is invested and so puts your capital at risk.

Whatever you decide to do when reviewing your current savings and investments or considering options for a new investment, taking a view on inflation, what might happen to it in the future, and most importantly the impact this will have on your capital, are all sensible places to start.

 

Click here to compare Instant Access Accounts »

Click here to compare Fixed Rate Bonds »

Click here to compare Fixed Rate investments »

Click here to compare Investment plans »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

The investment plans mentioned are structured investment plans that put your capital at risk and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance. These investments do not include the same security of capital which is afforded to deposit accounts.

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Savings Focus: Post Office Online Saver hits the easy access mark

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The latest version of the Post Office’s popular Online Saver account not only offers a highly competitive rate of interest, but also contains all the features you would expect from one of the most competitive accounts available on the high street. If you are looking for a new instant access savings account, or wish to transfer existing funds from an account that is no longer paying you a decent return, the Online Saver from the Post Office could be the right one for you. We take a closer look at what the latest issue has to offer.

Top interest rate

The main feature that sets the Post Office Online Saver account part from most of its competition is the interest rate. The account currently offers 1.27% AER variable gross, which at the time of writing is one of the best interest rates available on the high street.

Compared to other accounts?

The latest figures from the Bank of England* estimate that the average instant access account has an interest rate of a paltry 0.14%. This means that hundreds of thousands of savers in the UK could benefit from the Post Office’s Online Saver rate.

For example, if you have £50,000 in an average savings account you will receive just £70 per year, whereas, if you put £50,000 in the Post Office Online Saver account, you would receive £635 over the first 12 months. Just think what you could do with an additional £565…

Choice of monthly or annual Interest

An attractive feature for some savers is that the Post Office provide the option to receive interest monthly or annually, giving you the choice to decide when you are paid. The interest is paid into your Online Saver account so if you choose to have it paid monthly, you can also benefit from compound interest.

Instant access

The Online Saver account may be a good option for savers, as it offers competitive interest whilst allowing instant access to your savings. The account allows you to stay flexible with your savings, as there are no limits to the number of withdrawals you can make, and no penalties or notice periods.

Quick and easy

Withdrawals are made to your nominated account, which is normally set up as your current account, so you have quick and easy access to your savings. You can also make a deposit at any point, giving you complete control over your savings.

Any transactions can be made instantaneously through either the Online Saver’s online banking, or the Post Office app. It is important to bear in mind that you have to register for the Online Saver’s online banking service to manage your account via the internet or on the mobile app.

Underlying rate

The interest rate on offer includes a fixed interest bonus of 1.02% AER for 12 months from the account opening. Since it is fixed, this part of your interest rate is guaranteed not to change for the first 12 months. However, after 12 months it is important to note that the rate will revert to the Post Office’s underlying rate, which currently stands at 0.25% AER variable. Although this rate is still above the average quoted for instant access, at this point you would need to consider your options again.

Starting deposit and account balance

It is possible to open an account with the Post Office with just £1 and there is no minimum operating balance, once the account is up and running. There is no restriction on the size of a deposit, so long as the account’s balance does not exceed £2 million.

Available to all

Provided you are aged 18 or over and a UK resident, this account is open to all savers, both new and existing customer of the Post Office.

Easy to apply

The account has to be opened online but only takes a few minutes to apply. You can open your Post Office Online Saver by clicking here »

The Post Office

The Post Office is one of the best-known brands in the country having over 370 years of service. One of the UK’s largest financial services chains, they have over 11,500 branches nationwide which receives over 17 million customer visits per week.

Financial Services Compensation Scheme

The Post Office Online Saver is provided by the Bank of Ireland UK which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority. As a UK regulated bank, it is also a member of the Financial Services Compensation Scheme (FSCS). The Scheme can pay compensation to customers if they are eligible and the Post Office is unable to pay claims against it, for example if it ceases to trade or becomes insolvent. The Scheme will cover up to £85,000 per person for money held on deposit.

Find out more

To find out more about the Post Office Online Saver, please click here »

* Bank of England average quoted household interest rates for instant access savings, 30th September 2017

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

Gross rate is the interest rate you are paid without the deduction of income tax. The account does not deduct tax from the interest paid. The tax treatment may be subject to change in the future and depends on your individual circumstances.

What does an interest rate rise mean for me?

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Inflation continues at its highest rate in four years, which also means that it continues at a level way above the Bank of England’s 2% target. Despite the Bank’s indication that they will raise interest rates as early as November, any such hike is likely to coincide with further increases to the cost of living, whilst there is no certainty whatsoever that it will also contribute towards an increase in the amount of interest paid on savings accounts. Here we review the affects that rising inflation and a potential interest rate increase may have.

Soaring Inflation

The figures released last month by the Office for National Statistics (ONS) showed August’s inflation rate reached 2.9%, which equals a four year high in the Consumer Price Index (CPI). To make matters worse, it has been reported by the Organisation For Economic Co-Operation and Development, that the UK has the highest inflation rate in the world’s top economies, including the US, Canada, France, Germany, Italy and Japan.

Not only do the inflation figures seem bleak, but many forecast them to get worse. The CPI predicts that the inflation figures will climb to at least 3% by the end of 2017. The Bank of England share the same view, as their Inflation Report in August suggested that inflation could reach 3% as early as the end of October. The figures for the 12 months to September are due on 17th October.

Interest Rate On The Rise?

In light of the recent increases to the headline rate of inflation, the Bank of England has spent some time considering the present position of the official base rate. The Bank of England’s Governor Mark Carney says that they are close to raising the base rate from 0.25% to 0.5% in November, provided “there is no sudden and unexpected deterioration in economic data”.

The Bank of England’s chief economist Mr Andrew Haldane also predicts that there will be a hike to the interest rate in November, stating that it would be a positive move to get interest rates back to normal “even if the new normal is different to the old normal”. Mr Haldane added that he sees this as “a sign that the economy is recovering”.

Although it may seem reassuring that the Bank of England feel confident enough to raise interest rates as early as November, there is an uncertainty as to how this will affect households in the UK. One of the major concerns for homeowners is how an interest hike will affect their mortgage payments.

Interest Rates Affecting Mortgages

Statistics released by the Bank of England state that 43% of homeowner mortgages are variable or tracker rate mortgages. Those on a tracker mortgage will see any interest rate increase passed directly on to them since these are usually pinned to the Bank of England’s base rate directly. Those on other types of variable rates may also have some or all of the increase added to their annual interest rate, depending on the product and the lender. As an example, on an average mortgage of £125,000 with a remaining term of 20 years, an increase of 0.25% would increase monthly payments by £15 to £665. That would amount to an extra £185 per year.

The remaining 57% of homeowners with a mortgage are on fixed rate mortgages and so will be unaffected by any interest rate rise, at least until their initial fixed rate period ends, at which point they will revert to their bank’s Standard Variable Rate and as such may well be directly affected by interest rate rises.

What This Could Mean For Savings Accounts

An interest hike of 0.25% could possibly provide a positive effect on the rates provided by savings accounts however the likelihood of this actually happening, or at least happening quickly, is very low indeed. The Bank’s base rate is only one factor that contributes towards the general level of savings rates in the UK, and since we have seen record low savings rate whilst the base rate was at 0.50%, an increase back to this level is very unlikely to create any material increase in the savings rates on offer.

What is perhaps more worrying is that even if the full 0.25% was added to every savings account in the market, not even the best five year fixed rate would offer a level of interest that is close to matching the current rate of inflation, let alone beat it.

Time For A Change Of Strategy For Savers?

Therefore, even if the interest hike goes ahead as predicted, we will still see increasing pressure on UK households as mortgage payments will increase, but there will still be no savings accounts that will be able to get anywhere near the current rate of inflation. What’s more, with inflation forecasted to increase further towards the end of the year, there appears to be only one outcome for the foreseeable future – savers will lose money in real terms. As such, it may be time for a change of strategy.

Savers who want to try and avoid losing money in real terms may wish to consider capital at risk investment plans. These products provide savers with the opportunity to receive competitive rates of interest that could potentially combat the effect of increasing inflation. The trade off for potentially higher returns is that your initial capital is at risk.

Capital At Risk Products

With a capital at risk investment plan the capital is not invested directly into the stock market, but the potential returns are generally linked to the performance of the FTSE 100 Index. This allows them to offer the opportunity to generate competitive rates of return, especially when compared to fixed term bonds.

An example of one of the investment plans is the FTSE Enhanced Income Plan. This plan provides a fixed monthly income, which is paid regardless of the performance of the stock market, however it is important to note that the return of the initial capital invested is dependent on what happens to the FTSE 100 Index.

Click here to find out more about the Enhanced Income Plan »

Risk Versus Reward

When considering a capital at risk investment plan, it is important to bear in mind that they only offer conditional protection to the capital initially invested. This means that your capital is returned unless the FTSE falls by more than a certain percentage, normally in the region of 40% to 50%. Therefore, when it comes to capital at risk products, there is always a question of risk versus reward.

The principle of risk versus reward means that the search for higher returns than those available from cash, usually leads to the need to consider putting your capital at risk. A good benchmark for assessing any such investment is to compare what you could get from a fixed rate deposit over a similar time frame, and then consider whether you are prepared to accept the level of risk to your capital in return for potentially higher levels of interest.

In Conclusion

The effect of the Bank of England’s interest rate increase along with the possibility of a further increase to inflation cannot be ignored. The hike in interest rates will result in more expensive mortgage payments, whilst savings rate are likely to continue to offer rates that fall well short of the rising cost of living.

Therefore, the trade off with savings accounts is that although they do provide you with capital protection, the interest paid remains behind inflation and so savers face losing money in real terms as a result. Investment plans may provide an opportunity for returns that combat inflation, however, it is important to fully understand all of the risks involved before considering putting your capital at risk.

Click here to compare Instant Access Accounts »

Click here to compare Fixed Rate Bonds »

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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

The fixed income investment mentioned is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance. This investment does not include the same security of capital which is afforded to deposit accounts.

Investment Focus: Investec FTSE 100 Defensive Income Plan

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Last updated: 07/11/2017

With the increase to 2.9% for inflation over the 12 months to August, the focus on income and what we are earning from our capital is most certainly on the up as well, with many investors looking for the opportunity to secure more income in order to counter the effects of this rise in the cost of living. Despite only on its third issue, the FTSE 100 Defensive Income Plan from Investec is proving to be one of our most popular income investments ever, with the opportunity to receive a high level of income, even if the stock market goes down by up to 40%, thereby giving the plan an attractive balance of risk versus reward. Here we take a closer look at what exactly the plan has to offer.

Plan overview – income

The FTSE 100 Defensive Income Plan from Investec offers investors an annual income of up to 7.25%. Income payments are made quarterly, and the plan has a maximum fixed term of eight years, although it could also mature early or ‘kick out’ at the end of each year from year 2 onwards.

Plan overview – capital

If the plan does mature early, your capital is returned with your final income payment. If the plan runs for the full eight years, you will receive your initial capital provided the FTSE 100 Index has not fallen by more than 40% from its value at the start of the plan. This is known as conditional capital protection and is unique to structured investment plans such as this. If it has fallen below this level, your initial capital is reduced by 1% for each 1% fall in the Index, so you could lose some or all of your initial investment.

FTSE linked

The plan is linked to the performance of the FTSE 100 Index (‘the Index’ or ‘the FTSE’), with both the level of income you receive, and the treatment of your initial capital, dependent on what happens to the FTSE in the coming years. The FTSE 100 Index tracks the share prices of the 100 largest companies listed on the London Stock Exchange, and is widely recognised as the proxy benchmark for most investment managers, especially those investing predominantly in UK equities.

Potential 7.25% annual income

The FTSE is measured at the start of the plan, and then again at the end of each quarter thereafter. If the Index is above 80% of its starting level (i.e. it can fall almost 20%), a 1.8125% income payment is made. If the Index has fallen by 20% or more, no income payment is made for that quarter. The plan also includes a second, more defensive option, which offers up to 5.50% per year provided the FTSE does not fall by 40% or more at the end of each quarter.

Defensive income

There are very few investments out there offering the potential for such high income yields, particularly when income payments can be achieved even if the FTSE falls below its current levels. So for investors who are not confident the FTSE will rise in the future, but also want the potential to receive income that is significantly higher than the current rate of inflation, the Defensive Income Plan could be an attractive option.

Investment term

The FTSE 100 Defensive Income Plan requires an 8 year commitment from investors, which means that investors should be prepared to commit their capital for this length of time before investing. Although you are able to withdraw your money early, the plan is designed to be held for the full term and early withdrawal may result in you getting back less, or more, than you invested, since it is based on the market value as at the date of the withdrawal.

Kick-out opportunity

Despite having a maximum term of eight years, the plan also has the ability to mature early or ‘kick out’, which is also dependent on the FTSE. The plan will mature early in the event that the FTSE has gone up by 5% or more, annually from the end of the second year onwards. This means that should the FTSE increase by this amount in the future, investors will receive a final income payment along with a full return of their initial capital.

Conditional capital protection

Another feature of this plan is that it offers conditional capital protection. This means the initial capital invested is at risk if the FTSE falls by more than a fixed percentage, in this case, more than 40% below its value at the start of the plan. If it does, your investment is reduced by 1% for each 1% fall. For example if the FTSE fell by 39% then the investor’s capital is not affected, but if the FTSE fell by 41% then the investor would lose 41% of their capital. You should therefore only consider this investment if you are prepared to lose some or all of your initial investment.

Risk v reward

The principle of risk versus reward means that the search for potentially higher returns leads us to consider putting our capital at risk. A good benchmark for assessing the merits of an investment is to compare what returns can be secured from a fixed rate deposit over a similar timeframe (fixed income plus full capital protection), with the potential returns from the capital at risk product. One may then evaluate whether the risk to the capital is worth the opportunity to receive a potentially higher level of income.

Fair Investment view

Commenting on the plan, head of savings and investments at Fair Investment Company, Oliver Roylance-Smith, said: “This plan has two options, one paying up to 7.25% unless the FTSE falls 20% or more, the other paying up to 5.50% unless the FTSE falls 40% or more. Receiving such a high income, even if the FTSE goes down, makes for an attractive investment opportunity in any climate, not least one where we are seeing a sizeable increase in the day to day cost of living.”

He continued: “The plan also has the ability to mature early and return a final income payment along with your initial investment, and provides some capital protection against a falling stock market in the event it runs the maximum eight year term. By combining high income potential, the opportunity for early maturity and conditional capital protection, it is perhaps understandable why this plan has generated a great deal of interest with our investors.”

This plan accepts new ISA investments up to the £20,000 ISA allowance, Cash ISA and Stocks & Shares ISA transfers, as well as non-ISA investments. The minimum investment is £3,000.

 

Click for more information about the Investec FTSE 100 Defensive Income Plan »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. ISA transfer charges may apply, please check with your provider.

This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.

Latest inflation, wage growth, interest rates and what this means for your savings

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The latest figures indicate that inflation bounced right back up to 2.9% in the month of August. This means that the headline rate of inflation continues at a level well above the Bank of England’s 2% target. What’s making matters worse is that earnings are not increasing anywhere near enough to keep pace, thereby increasing the financial pressures felt by many households in the UK. So it is vital to consider all of your options in light of the impact inflation and sluggish wage growth could have on your savings. We therefore take a closer look at what is happening in the UK and explore the possible ways to get the most from your savings.

Inflation Latest

UK inflation, as measured by the Consumer Price Index (CPI), dropped unexpectedly from 2.9% in May to 2.6% in June and remained at 2.6% for July. However, according to the latest figures from the Office of National Statistics (ONS), inflation returned to the heights of 2.9% in August.

The increase to 2.9% recorded in May and again in August 2017 is the highest inflation level since April 2012, the rate having slowly increased after a much welcome period of very low inflation during 2015. It may shock many savers to learn that inflation sat at just 0.9% a short 12 months ago.

Economists who witnessed inflation balloon by 2% in a year do not forecast a bright future for the next few months, as The National Institute of Economic and Social Research (NIESR), believe it will reach 3% by the end of 2017. This widely accepted pessimism was underpinned by the Bank of England’s (the Bank’s) Inflation Report in August, which predicted that inflation will likely peak at 3% as soon as October of this year.

The Future for Interest Rates

In line with the Bank of England’s recent summary, the Monetary Policy Committee (MPC) predictably voted by a majority of 6-2 to maintain interest rates at the record low of 0.25%. The recent decline in inflation may fill some with confidence that the Bank will raise interest rates soon. However, Charlie Bean, the former Bank of England’s deputy mused “it looks like the economy might be slowing, it seems like an odd time to increase interest rates”.

Upon review of the slow growth in the economy and the current rate of inflation, NIESR predicts that the Bank may increase interest rates in the first quarter of 2018, whilst Stuart Green of Santander Global Corporate Banking said that he “did not expect a rate hike to happen before 2019”. Either way, this does not fill us with a great amount of confidence.

Uncertainty

Some have suggested that the interest rate will not increase until after Brexit negotiations are finished and judging by the latest reports about the negotiations, it seems we could be waiting a long time before the Band of England decide to raise interest rates again.

Even though the question is not ‘if’ the Bank of England will increase interest rates but ‘when’, the rate is likely only to increase to 0.5%, and so the impact on savings rates is likely to be minimal in the short term, and only very gradual over time.

Lagging Wage Growth

With inflation and the question marks over whether to increase interest rates, UK households are enduring a prolonged period of sluggish wage growth. In the last four months wage growth has experienced the biggest drop since August 2014.

Unfortunately, the pressure on incomes is likely to continue as the latest forecast for pay rises sits at just 1%. Households all over the country are feeling the pinch and their wages just do not go as far as they used to, resulting in people spending less money. UK consumer spending is down for the third month in a row.

With less disposable cash, fewer people have been able to put money aside into their savings, and it is no secret that the less you put into savings, the less you will get from it. Ultimately this leads us to the same conclusion: it remains as important as ever to find the best returns on offer.

Savings Products

Fixed rate bonds have historically been the cornerstone product for many savers. However, the rates on offer from these accounts have probably changed more than any other in recent years. Continued reductions in the returns from fixed rate bonds have seen many savers suffering significant falls in the income received from their savings.

At the time of writing, there is not a single fixed rate bond that matches the rate of inflation, and as a result, many savers are losing money in real terms. What’s more, the best savings rates currently on offer from an instant access account provides around 1.25% AER, which sits well below the rate of inflation.

Do Your Homework

Despite the mounting pressure from potentially increasing inflation and sluggish wage growth, it is important to take the time to make the right decision for your financial circumstances. It may be appropriate to review the current amount of interest paid on all your savings and compare this with other savings accounts on the market.

Although the current crop of savings accounts do not come close to matching inflation, if you do not want to put your capital at risk then there are not many options available. However, making sure you have found the best deal for your savings has to be a top priority.

Compare Instant Access Accounts »

Compare Fixed Rate Bonds »


Taking on More Risk or Face Losing Money in Real Terms

The harsh reality in today’s economic landscape is if you do nothing, your money is losing value in real terms so long as the interest rate you receive is lower than inflation. One course of action to combat the effect of inflation is to consider a change of strategy.

The current inflationary environment, along with the slow wage growth and poor interest rates, means that savers may have to consider taking on more risk with some of their capital, in order to try and replicate previous interest rates and secure better returns from their capital.

Capital at Risk Products

One alternative for savers is to consider capital at risk investment plans. These products offer the opportunity to secure competitive returns to potentially beat inflation. Though the capital is not directly invested in the stock market, the potential returns are generally linked to the performance of the FTSE 100 and so offer the potential for competitive rates of return when compared to fixed term bonds.

One such investment plan uniquely offers a fixed monthly income, paid to you regardless of what happens to the stock market, with only the return of your initial capital dependent on the performance of the FTSE 100 index (rather than your income as well).

Risk Versus Reward

Of course, it is important to note that these products do not provide the capital invested with complete protection, and there is a risk of losing some or all of the initial investment. When it comes to capital at risk products there is always a question of risk versus reward.

The principle of risk versus reward means that the search for higher fixed returns usually leads to the need to consider putting your capital at risk. A good benchmark for assessing your fixed rate investment is to compare what you could get from a fixed rate deposit over a similar time frame, and then consider whether you are prepared to accept the level of risk to your capital in return for the higher fixed rate.

In Conclusion

However you decide to proceed, the impact of lagging wage growth, low savings rates and the possibility of soaring inflation cannot be ignored. Although savings accounts offer complete protection for your capital, it seems that the record low savings rates are here to stay for the foreseeable future. This could result in savers’ capital diminishing in value and losing money in real terms but before considering capital at risk products, you must make sure you fully understand all of the risks involved before proceeding.

Click here to compare Instant Access Accounts »

Click here to compare Fixed Rate Bonds »

Click here to compare Fixed Rate investments »

Click here to compare Investment plans »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

The fixed income investment mentioned is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance. This investment does not include the same security of capital which is afforded to deposit accounts.

Investment Focus: Investec Enhanced Kick Out Plan

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Last updated: 07/11/2017

A kick out investment plan is a fixed term investment plan that has the ability to kick out or mature early each year, providing a fixed growth return along with a full repayment of your initial capital.  These investments have proved popular with a wide range of investors looking for high investment returns, especially since growth can be achieved even when the market does not perform strongly.

Investec’s Enhanced Kick Out Plan offers the potential to achieve one of the highest headline growth rates of any kick out investment that is linked to the performance of the FTSE 100 Index. We take a closer look at the plan and review the risk versus reward on offer to see how this might make for an attractive opportunity in the current investment climate.

Plan summary

The plan has the potential to provide 9.35% growth per year (not compounded) so long as the FTSE 100 index, at the end of each year, is higher than its value at the start of the plan.  Although to achieve these returns the FTSE has to rise, it only needs to increase by a single point. In the event that the plan kicks out, then your capital is returned in full along with the accrued interest.  If the plan does not kick out, then your capital is at risk. In the event that the FTSE has fallen by more than 40% from its level at the start of the plan, your capital will be reduced by 1% for every 1% fall.

Kick Out (early maturity)

The plan comes with the ability to kick out or mature early, depending on the performance of the FTSE. The plan has a maximum term of six years. However, at the end of each year, if the FTSE is higher than its starting value (subject to averaging – see below) the plan will mature early.  The type of plan has become popular with all types of investors, as it can provide competitive investment returns and even outperform the market in the event that the market stays relatively flat.

The use of averaging

When calculating the level of the FTSE at the end of each year for the purposes of comparing it with its value at the start of the plan, the plan takes the average closing levels of the Index for the five business days up to and including the end of each plan year. The use of averaging can reduce the adverse effects of a falling market or sudden market falls whilst it can also reduce the benefits of an increasing market or sudden market rises before the maturity.

Potential for high returns

As well as the ability to mature early, the plan’s potential to achieve almost double digit returns draws attention from a wide range of investors.  The headline rate for the current issues of the Enhanced Kick Out Plan is 9.35% annual growth, and although the return is not compounded, it will be paid for every year the investment has been in place. The opportunity to achieve such high returns, even if the FTSE’s growth is relatively flat, is perhaps the main reason for why this plan has been so popular with our investors.

Some capital protection from a falling market

It is important to note that an investor will have to put their capital at risk in order to receive potentially higher returns than are available from cash deposits, since any growth and the treatment of your initial capital are both linked to the performance of the FTSE.

The plan does offer some capital protection as well. If the plan fails to kick out by the end of the sixth year, the return of your initial investment will depend on whether the FTSE has dropped more than 40% of its starting value. This means that the FTSE can fall up to 40% of its starting value and you will still receive a full return of your initial capital. Conversely, if the FTSE has decreased by more than 40% then the capital you invested will be reduced by 1% for every 1% the Index has fallen.

Defined risk and defined returns

One of the reasons this investment plan has become so popular with our investors, is that the potential returns are stated up front, so if any growth is achieved, you will know exactly what the return will be. These defined returns for a defined level of risk make it easier to weigh up whether you are prepared to put your capital at risk for the potential higher returns on offer, since you know precisely what needs to happen to receive the interest rate you want.

Investec as counterparty

The Enhanced Kick Out is a structured investment plan which means your investment is not the same as investing directly in the stock market. When you invest in a structured investment plan, you are essentially purchasing securities issued by Investec Bank, which are designed to produce the stated returns on offer.  In this case, Investec is known as the counterparty to your investment, and means that their ability to meet their financial obligations becomes an important investment consideration with this type of plan.

Credit rating

Fitch is one of main global credit rating agencies in the industry and Investec Bank plc has a credit rating of BBB- with a stable outlook. The ‘BBB’ rating denotes an adequate capacity for payment of financial commitments although adverse business or economic conditions are more likely to impair this capacity with the ‘-‘ signifying it is at the lower end of this rating grade. This means that Fitch believes that Investec Bank plc has a good credit quality and indicates that expectations of default risk are currently low.

Investec Bank Plc

Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, they provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. They are also a market leading provider of investment plans and structured deposits.

Investec is an international specialist bank and asset manager with its main operations in the UK and South Africa. Established in 1974, they currently employ around 9,000 people and as at 31st March 2017, look after £150.7 billion of customer assets. They provide a diverse range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their banking operation looks after £29.1 billion of customer deposits and they are also a market leading provider of investment plans and structured deposits in the UK.

ISA friendly

In addition to non-ISA investments, this investment has been one of our most popular with ISA investors and is available as a New ISA up to the current £20,000 ISA allowance, and also accepts transfers from both Cash ISAs and Stocks & Shares ISAs. Please check the plan details for any application or transfer deadlines that apply. The minimum investment is £3,000.

Fair Investment conclusion

Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “The Enhanced Kick Out Plan from Investec has been our most popular kick out plan for some years. The reason why investors are drawn to this plan will be varied and will of course depend on your view of what might happen to the FTSE in the coming years, but the ability to produce close to double digit returns even if the market stays relatively flat is likely to be an attractive feature.”

He continued: “The plan can also mature every year from year one onwards, whilst with other similar plans you may have to wait until at least year 2. Combined with offering some capital protection against a falling stock market and on balance, this plan could offer a compelling balance of risk versus reward in the current investment climate.”

 

Click here for more information about the Investec Enhanced Kick Out Plan »

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. ISA transfer charges may apply, please check with your provider.

This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.  This investment does not include the same security of capital which is afforded to a Cash ISAs.

Summer sizzlers: our hottest savings and investment ideas this summer

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Last updated: 29/08/20176

Whilst our sprinters surged forward to a compelling and action packed final weekend at the World Championships, the Bank of England on the other hand refused to take action and raise interest rates this month by keeping the base rate at a record low of 0.25%. With no indication whether the Bank of England will raise interest rates any time soon, this is a useful reminder for both savers and investors to regularly review their options. So to help you stay on top of what the current market has to offer, we bring you a selection of some of our most popular savings and investment deals available this summer.

Interest Rates

The economic landscape has not changed much since the Bank of England maintained its record low position on interest rates. The base rate of interest remains at 0.25%, and with it the vast majority of savings rates have continued to sit well below inflation. And the future not only looks bleak for savers, but investors too as the higher yielding FTSE 100 companies begin to show signs of strain, with factors such as currency feeding concerns that these dividends look increasingly unsustainable and so are likely to fall.

So both savers and investors face the same dilemma: how can I make the most out of my capital this summer?

Under the Spotlight

Unfortunately, for many savers longer term financial products no longer provide the 5%+ returns of yester-year, and this significant drop in headline savings rates has made it much harder to commit to tying up money for longer periods of time. As a result of this, we have seen a lot of activity this summer in the shorter term savings space, particularly into instant access and current accounts.

In addition, savers have seen interest rates stagnate and their savings being increasingly eroded with the impact of higher inflation. This has led to some having to consider taking on more risk with some of their capital, in the hope of achieving the levels of returns they have enjoyed in previous years. So we also cover some of our income and growth investment best sellers.

Current Accounts

Up until a few years ago, current accounts were infamous for their low interest rates, with most paying nothing at all on any monthly balances. However, in the last few years banks have placed an emphasis on improving their products, with some banks offering very competitive rates in order to win new customers.

Whilst the majority of these accounts place a cap on the amount that they are willing to pay interest on, the rates themselves are attractive. Therefore, if you’ve not switched for a while, it may be beneficial to compare these to your existing current account and find out how much more you could earn from your everyday cash.

The Santander 1|2|3

The Santander 1|2|3 current account provides the opportunity to receive 1.50% AER variable on your entire balance up to £20,000, a rate that is higher than the market leading instant access account (see below). It also has the added bonus of providing up to 3% cashback on various household bills including gas, electricity, water, broadband and even your Santander mortgage. This account has a monthly fee of £5, and their website allows you to compare the annual cost with the amount of interest you could earn plus any cashback on your current monthly bills.

Instant Access

An instant access account may be an attractive option for those who might need access to their cash at very short notice. These are savings accounts that pay interest and allow you to withdraw money whenever you need it. Generally, you decide how much or little you put into the account.

Ulster Bank eSavings

For those who wish to enjoy the freedom of banking on the go, along with a market leading interest rate, Ulster Bank’s eSavings may be one of the best options. The account can be opened completely online and then managed online, via their banking app or over the telephone. Ulster Bank eSavings account offers 1.25% AER variable, with no tiered interest and no minimum deposit.

According to the Bank of England, the average instant access account is currently paying only 0.15%*. Based on a balance of £50,000, the eSavings account would pay £625 per year compared to just £75 from the average account, which is an additional £550 per year.

RCI Bank Freedom Savings Account

RCI Bank Freedom Savings Account offers 1.20% AER variable gross to both new and existing customers for any amount up to £1,000,000. Although the account requires an initial payment of at least £100 within the first 30 days of opening, the account is free to use and there are no fees, penalties or tiered interest rates. RCI Bank is part of the Renault global banking group and so the first €100,000 is protected by the French deposit guarantee scheme (FGDR) rather than the UK FSCS.

Short Term Fixed Rate Bonds

For many savers, the majority of longer fixed term rate bonds simply do not offer enough of an uplift in rate to justify having your money tied up for extended periods of time. For many savers therefore, it may be beneficial to consider shorter term fix rate bonds.

Access Bank UK offer short term fixed rate bonds that provide competitive rates. In order to access these rates you must make a minimum deposit of £5,000 and each account has a maximum deposit of £500,000. Although you can only make one deposit per account, Access Bank UK doesn’t put a cap on the amount of accounts you can open at once. All deposits are eligible for FSCS protection.

1 Year Access Bank: offers an interest rate of 1.70% AER fixed for 1 year

2 Year Access Bank: provides a fixed interest rate of 1.90% AER over 2 years

Medium and Longer Term Fixed Rate Bonds

For savers willing to part with their money for a longer period of time to receive higher returns, Vanquis Bank has a selection of products offering very competitive interest rates. There is a minimum deposit of £1,000 and a maximum deposit of £250,000. No withdrawals are allowed over the course of the fixed term and all deposits are eligible for FSCS protection.

3 Year Vanquis Bank: offers an interest rate of 2.20% AER fixed

4 Year Vanquis Bank: offers an interest rate of 2.35% AER fixed

5 Year Vanquis Bank: offers an interest rate of 2.50% AER fixed

Capital At Risk

Capital at risk products allow investors to access potentially higher interest rates at the expense of accepting their capital will be at risk.

Risk versus Reward

The balance of the potential upside of higher returns versus the potential downside of losing some or all of your capital is generally known as risk versus reward. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe, and then consider whether you are prepared to accept the level of risk to your capital in return for either a higher fixed rate, or the potential for a higher variable income.

Fixed Income Investment

Investec FTSE 100 Enhanced Income Plan

If you need to know exactly how much you will get paid, when and for how long, Investec’s FTSE 100 Enhanced Income Plan may be an option to consider. This plan offers a fixed interest rate of 4.35% per year for the fixed term of 5 years, and offers monthly income payments. The plan offers some capital protection but if the FTSE falls by more than 40% then you may lose some or all of your capital.

Higher Yield, Variable Income Investments

For those looking for higher income opportunities, the Meteor and Investec plans below offer up to 8% interest per annum, but rather than a fixed income, how much you receive is dependent on the performance of the FTSE 100 Index. Each plan also has the ability to mature early (or ‘kick out’) in the event that the FTSE has gone up by 5% or more from the second year onwards – measured each year and each quarter respectively. If the plan does not mature early, your capital will be at risk if the FTSE has fallen by more than 40% at the end of the plan term. If it has, you will lose some or all of your initial capital invested.

Meteor FTSE Monthly Income Plan: this plan has a maximum term of 10 years and offers a potential monthly income of 0.67% (equivalent to 8.04% annually).

Investec FTSE 100 Defensive Income Plan: this plan has a maximum term of 8 years and offers a potential quarterly payment of 2.0% (equivalent to 8.0% per year).

Defensive Growth Investment

The Investec Defensive Step Down Kick Out Plan is our most popular defensive investment and has the potential to return 6.25% for each year invested, provided the FTSE finishes at the required level at the end of each year. The required level is 100% of its starting value at the end of year 2, and then reduces by 5% each year thereafter, down to 65% in the final year (i.e. if can fall up to 35% and you still receive your growth return).

If the FTSE is below the required level each year then no growth will be achieved and at the end of the plan your original capital will be returned. However, it is important to note that if at the end of the plan the FTSE 100 Index has fallen by more than 40% from its level at the start of the plan, your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

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* Source: Bank of England: Bank of England average quoted household interest rates for instant access savings, 31st July 2017

 

AER stands for the Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year.

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek professional advice.

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.

The investments in this article are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.