The pressure on savers to maximise the returns from their capital is arguably greater than ever before, but despite inflation being at rock bottom, the current market for instant access and fixed rate bonds rarely offers us anything to shout about. We therefore take a look at a selection of opportunities that are being considered by savers looking for the potential to enhance their returns, all of which are available both in and outside of an ISA.
Savings rates, dire straits
The mainstay of many a saver’s portfolio has historically been the fixed rate bond. However, rates here still remain at historically low levels as banks have been able to secure cheap funding by alternative means which has resulted in an increasing number of savers shoring up reserves in instant access accounts. But with leading deals only offering around 1.25% AER variable, there is little prospect of growth on your capital over and above the cost of living. And with longer term fixed rates only offering around 3.0% AER, long gone are the days where committing your money for longer was all you needed to secure a competitive rate.
Alternatives bridging the gap?
The implications of the current savings rates on offer need to be taken very seriously since it calls into question the traditional thinking behind many saver’s decisions. Also gone are the days when it was enough to keep a relatively small amount in instant access and then simply roll your fixed rate bond into the prevailing rate available at maturity.
Although fixed rate bonds should continue to play an important part in the savings jigsaw, their status as being the only option for money we do not need immediately should be carefully reviewed, especially in the context of the historically low rates on offer. So what alternatives are being considered?
Last updated 24/11/2015
Structured deposits have experienced a rapid rise in popularity on the back of a sustained period of record low interest rates and falling savings rates. Whilst fixed rates remain under pressure and there is still uncertainty around the real increase in the cost of living in many parts of the UK, many savers are having to consider investing in order to try and meet the increased demands from their capital. But there is a middle ground that does not put your capital at risk – the structured deposit. To help you better understand this alternative product range, and to help you find out whether they could work alongside the other savings you have, we have put together our Saver’s Guide to Structured Deposits.
Savings rates reality
The mainstay of many a saver’s portfolio has historically been the fixed rate bond. However, rates here have been under continued pressure as banks have been able to secure cheap funding by alternative means. This means long gone are the days where committing your money for longer was all you needed to secure a high return that also had the potential to outstrip inflation. With many maturing fixed rate bondholders facing significant falls in the yields available, longer term fixed rates are in many cases failing to meet the needs of savers.
In addition to investing some of this capital to try and make it work harder, at the other end of the risk spectrum this has also resulted in a worrying trend of many savers shoring up more money than they normally would in instant access accounts. With many of these failing to offer rates anywhere close to inflation, savers are losing money in real terms – and that’s before the impact of tax is taken into account. So savers continue to face the toughest of decisions – either lose money in real terms from a savings account or take on more risk – and it is against this savings rates reality that the structured deposit has increased in popularity.
What are structured deposits?
Structured deposits are fixed term deposit accounts paying a return linked to the performance of an underlying investment, often the FTSE 100 Index or several shares in FTSE 100 listed companies. They therefore typically offer higher potential returns than a cash deposit, but also involve taking on more risk since unlike instant access accounts and fixed rate bonds, the return from a structured deposit is not guaranteed. They normally have a term of around five or six years although some also have the ability to mature early each year.
Who are they for?
Since your return is not guaranteed, they are for savers who are willing to give up the interest on a standard deposit for a potentially higher return linked to the performance of an underlying investment.
Income needs are a top priority for both savers and investors, evidenced by the increasing number of our existing customers and those new to Fair Investment looking for income solutions. With this in mind, we have put together our Top 10 income ideas for 2015, including fixed income investments, investment funds and other high yield opportunities. We also give you our in-house view of each from Oliver Roylance-Smith, our Head of Savings and Investments and for those who are yet to use their ISA allowance, all are available within an ISA so you could benefit from tax free income.
1. Income best seller – 5.16% fixed income, monthly payments
The Enhanced Income Plan from Investec was our most popular income investment in 2014 and continues to be a best seller. The main appeal is that it offers a fixed income for a fixed term, regardless of the performance of the FTSE 100 Index, so you know exactly how much you will receive, when and for how long. The annual income is currently 5.16% (paid as 0.43% each month) which is high when compared to typical yields currently being paid by equity income funds. Capital is at risk if the FTSE drops by more than 50% during the plan and fails to recover by the end of the term, in which case your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.
Fair Investment view: “5.16% tax free income (if held in an ISA) is the equivalent of 6.45% taxable income for a basic rate tax payer and 8.60% for a higher rate tax payer. This high level of fixed income and the monthly payment frequency are popular features and with limited options for anyone looking for a fixed income over 5%, this plan offers a competitive balance of risk versus reward that could be considered by both savers and investors”
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2. High yield opportunity – up to 6% income, quarterly payments
The FTSE Contingent Income Plan from Focus (Credit Suisse acting as counterparty) offers the opportunity for up to 6% per year. Your income is dependent on the performance of the FTSE 100 Index and a quarterly payment of 1.50% is made provided the Index at the end of each quarter is at or above 75% of its level at the start of the plan. If the Index is below this level, no income payment will be made for that quarter. Additionally, the plan offers the opportunity to mature early from year 3 onwards returning your original capital plus a final income payment. If the plan runs for the full term you will receive your initial investment back unless the FTSE has fallen by more than 40%, measured at the end of the fixed term only. If it has fallen below this level, capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.
Fair Investment view: “The ability for the FTSE to fall 25% and investors to still receive 6% income could be an attractive investment proposition in the current climate, especially for those who are looking for income but are not convinced the FTSE can continue to rise. Combined with some capital protection against a falling stock market and this plan is certainly worth a closer look.”
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3. High fixed income – 7.50% fixed income, monthly payments
The FTSE 5 Monthly Income Plan from Meteor (Commerzbank acting as counterparty) offers a fixed income that is paid to you regardless of the performance of the stock market, the current version offering 7.50% annual income, paid as 0.625% each month. This high level of income is in exchange for a higher level of risk as the return of your initial capital is dependent on the performance of five FTSE 100 shares rather the Index as a whole. Should the value of the lowest performing share at the end of the five year term be less than 50% of its value 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.
Fair Investment view: “The fixed income on offer equates to a total return of 37.5% over the term of the investment and has been particularly popular with our ISA investors since if held within an ISA, there is no tax to pay on the income. The plan might also appeal to investors looking for a high level of fixed and regular income however, the fact that the return of your initial capital is based on the performance of five shares rather than the Index as a whole does make this a higher risk investment.”
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With the top paying savings accounts and cash ISAs struggling to offer attractive returns, peer-to-peer lending accounts are becoming increasingly popular with savers fed up with low interest rates. Peer-to-peer lending sites can offer an alternative to traditional banking and can have the potential to achieve a better rate of interest. Investing your savings in a peer to peer lending scheme can offer better returns than more conventional forms of savings however there are risks, such as your funds not being covered by the Financial Services Compensation Scheme (FSCS).
What is peer to peer lending?
In simple terms, peer to peer lenders match people who want to earn interest on their savings with people who want to borrow money. The advantage of this arrangements is that both savers and borrowers can benefit from interest rates that are better than those found on the high street, whether from conventional savings accounts or from bank loans.
How does peer to peer lending work?
Investors can register with a peer to peer lender, and will usually be offered the choice of how long to commit their money for – for example, some peer to per lenders offer different interest rates in return for locking your cash away for one, two or five years. Your money is then matched with people who want a loan for the same time period.
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