Monthly archive for July, 2016

Current account focus: our Top 3 high interest current accounts

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Last updated: 27/09/2016

Although we use our current account more than any other, it is often the one that we review the least in terms of comparing it with the latest the market has to offer. But with interest rates as high as 5.0% on offer, various types of cashback and other financial incentives, along with a 7-Day Switch service that offers peace of mind to those that do switch, the market for current accounts is the best its ever been. So here we take a look at the three accounts which are proving most popular with those either making the switch, or choosing to take out a second account.

High interest

Historically, current accounts have been renown for offering paltry rates of interest, and it is only fairly recently that this has significantly started to change. What this now means is that, provided you are usually in credit with your account, you can now be rewarded with very healthy rates of interest indeed. Not only do all of the accounts featured offer full banking services and have VISA debit cards available, but because of the interest rates on offer the amount that can be achieved when compared with leading instant access and short term fixed rate bonds, can be compelling in its own right.

Current account versus savings account

Therefore, although these should be technically described first and foremost as current accounts, they also have every right to be considered amongst the range of options for savers, especially since they are predominantly offered by the main high street banks and building societies and so eligible deposits are covered by the Financial Services Compensation Scheme.

Could you get more from your current account?

Many existing accounts pay no interest at all, so with up to 5.0% available it is always worth comparing what the market has to offer. Staying put simply because you have all of your direct debits set up is no longer a valid reason, especially since the introduction of the current account switch guarantee (see below for further details).

Our top three selections

Each account has its own features and criteria, and most usually require a minimum amount to be paid in each month to qualify for the headline interest rate, with different rates being paid for different levels of account balance. Here we take a look at our three most popular high interest current accounts.

5.0% on balances up to £2,500 for 12 months

Nationwide’s FlexDirect is our most popular current account, mainly due to the level of interest it pays on all in-credit balances up to £2,500. The interest rate is 5.0% AER (4.89% gross p.a.) which is fixed for the first 12 months of the account being opened. To receive this rate, you must pay in a minimum of £1,000 per month (excluding internal transfers). There is no monthly account fee, a fee-free overdraft is included for the first 12 months and you can manage your account online or via automated telephone banking. After 12 months the rate reverts to 1.0% AER variable.

Fair Investment view: “The FlexDirect from Nationwide offers a market leading interest rate on balances up to £2,500 although the £1,000 you are required to pay in each month is at the higher end. There is also no monthly account fee, so all of the interest earned goes straight into your pocket. Although the rate drops to 1% variable after the first 12 months, this is still considerably more than most current accounts and not that far off some of the top easy access accounts currently on offer.”

5.0% variable on balances up to £2,000

TSB’s Classic Plus account also offers 5.0% AER (variable) interest, payable on balances up to £2,000. No interest is paid on balances above this amount and although the 5.0% is variable, it is paid ongoing (i.e. is does not drop down after a set period of time). In order to receive this rate you must pay in a minimum of £500 per month, as well as register for internet banking, paperless statements and paperless correspondence. The account also offers 5% cashback on your first £100 of contactless or Apple Pay payments each month (this offer ends December 2016 and terms and conditions apply).

Fair Investment view: “The 5.0% headline rate matches that from Nationwide’s account although it is a variable rate (rather than fixed) and is paid on a slightly lower account balance of £2,000 – however, the amount you are required to pay in each month is at the lower end of the high interest current accounts available. As with Nationwide’s account, there is no monthly account fee and the fact that the variable interest rate continues without a time limit could make this an attractive option for those looking beyond 12 months.”

Up to 3.0% interest and 3% cashback

The Santander 1|2|3 account combines a competitive rate of interest with the opportunity to receive cashback on a number of your main household bills. You will receive 3.0% AER variable once your balance is at least £3,000, payable on your entire balance up to a maximum of £20,000, with lower rates of interest paid on balances of less than £3,000. Please note that interest paid on the account will change to 1.50% AER on all balances up to £20,000 from 1st November 2016. You can also earn up to 3% cashback on selected household bills such as council tax, gas and electricity, broadband, mobile phones and more. You must pay in at least £500 per month and have at least two active direct debits to receive interest and cashback. There is a £5 monthly account fee.

Fair Investment view: “Because of the way the interest is calculated, this account is likely to appeal to those with higher in credit balances, particular those who regularly have over £3,000 available. For example, if you had £4,167 in your Santander 1|2|3 account, you would earn the same interest as you would be paid on 5.0% AER on a balance of £2,500, whilst this account continues to pay interest on higher credit balances up to £20,000. So if you’ve got savings of £3,000 or more, this account could offer a compelling overall rate of interest, as well as cashback on your monthly bills.”

7-Day Switch

Apart from the low interest rates generally on offer, one of the main reasons many of us have stayed with our current account provider far longer than other type of account, is the fear that something would go wrong with the direct debits associated with our account. However, since the introduction of the current account switch service in September 2013, the whole process of switching banks is easier and will now be completed in seven working days – the 7-Day Switch.

Over 40 banks have signed up to the service (including Nationwide, Santander and TSB), which makes sure that all outgoing payments, such as standing orders and direct debits, will be transferred across to your new bank on your behalf. The service also guarantees that should any incoming payments be sent to your old account in error, these will be automatically redirected to your new account for up to 36 months after your switch date. This means the banks do all the hard work for you, making switching smoother and faster.

To switch or not to switch?

The 7-Day Switch rules therefore offers peace of mind to anyone considering a switch from their current account provider. However, you don’t necessarily have to switch your current account – Santander is the only provider in our top three which requires you to have any active direct debits (at least two), and so if maximising interest is your top priority, you could also consider taking one of these accounts out in addition to your existing current account, thereby leaving everything you already have in place. You will of course have to make sure you pay in the minimum amount required each month in order to earn the level of interest on offer.

Always compare

Do not let the thought of moving your current account put you off. The competition for current accounts has rocketed in the last couple of years and hundreds of thousands of people have already made the move to a new account. So as major banks and building societies compete for your custom, always remember to compare the interest rate and any other benefits your current account offers with the best market has to offer – you may be surprised at just how much difference it could make…

 

Click here for more information on Nationwide’s FlexDirect account »

Click here for more information on TSB’s Current Plus account »

Click here for more information on Santander’s 1|2|3 account »

Click here to compare high interest current accounts »

 

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

Gross is the interest you will receive before tax is deducted.

 

BREXIT and the FTSE: defensive investment plans rise to the challenge

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Last updated: 11/10/2016

The recent decision made by the UK to leave the European Union has unsurprisingly forced many investors to reconsider their options, especially since there remains so much uncertainty around the potential impact of this decision on our economic growth and stability. Regardless of whether you were for remaining or leaving, taking a view on what might happen to the FTSE in the short to medium term is certainly something on the minds of many. With this in mind, we take a look at a selection of defensive investments to find out exactly what they have to offer and how the risk versus reward might be appealing for those who are concerned about the impact Brexit may have on future investment opportunities.

What is a defensive plan?

Defensive plans offer the potential for investment level returns, even if the stock market goes down, in some cases by up to 50%. Partly as a result of the FTSE continuing at historically high levels in recent years, there has been an increase in the number of plans that offer a competitive return even in the event that the market fails to rise. These are commonly known as defensive investment plans and for those who are not confident that the market will continue to rise in the medium term, they have become an increasingly popular investment opportunity.

Different types

Although each plan has its own features, collectively they are growth investments which offer the potential for either a fixed return for every year invested (not compounded), or a fixed return at the end of the full term, both of which are dependent on the performance of the underlying investment, usually the FTSE 100 Index. Each of these investments will be structured to offer a defined return for a defined level of risk, and as such you will know from the outset exactly what must happen in order to receive the stated returns on offer.

A middle ground

Defensive investments therefore try and offer the best of both worlds by offering the potential for investment level returns, even if the underlying investment only rises by a small amount, stays flat, or goes down slightly. This means they are designed for investors who have a neutral or negative outlook of what could happen to the stock market in the coming years, and yet who would still like the opportunity to receive the potential for investment level returns. Here is a selection of the current range of defensive plans on offer:

Returns even if the FTSE falls up to 10%

If the FTSE had fallen by 5% in 3 years time and yet you still received 24.0% growth plus a return of your initial capital, would you consider this a good investment? The Investec FTSE 100 Defensive Kick Out Plan has a maximum term of six years but will kick out (mature early) at the end of each year from year 3 onwards, provided the FTSE is above 90% of its value at the start of the plan. If it is, then you will receive 8.0% for each year invested (not compounded). If the Index has fallen by 10% or more, your investment continues.

If the plan does not produce a return, your initial capital is returned in full unless the Index has fallen by 50% or more, measured at the end of the plan term. If it has, your capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.

Returns even if the FTSE falls up to 20%

Our next defensive plan is another kick out plan, the FTSE Defensive Kick Out from Focus, and will kick out and return your initial investment along with 7.15% for each year invested (not compounded) provided the FTSE 100 is at the required level at the end of each year, from year 2 onwards. The required level is 100% of its starting value at the end of year two, reducing by 5% in each of the following years down to 80% in the final year. So the FTSE could fall up to 20% and you would still receive 7%+ returns on your investment.

If the Index closes below the required level each year, no growth return will be paid and your initial capital will be returned in full unless the FTSE has fallen by more than 40% at the end of the term. If it has, your initial investment would be reduced by 1% for each 1% fall, and so you could lose some or all of your investment.

Returns even if the FTSE falls up to 50%

Our final defensive investment is the Investec FTSE 100 Defensive Growth Plan, which offers a fixed return of 34% at the end of the investment term provided the value of the FTSE is more than 50% of its value at the start of the plan (subject to averaging). Therefore, the FTSE can fall up to 50% and investors would still receive a 34% growth return, along with a full return of their original capital. The 34% return is equivalent to 5.0% compound annual growth.

If the Index has fallen by 50% or more at the end of the term, no growth will be achieved and 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

Commenting on defensive investment plans, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company said: “Despite the recent volatility in the FTSE the Index currently remains at historically high levels, but for those investors who are not confident that the market will rise in the medium term, knowing that you can achieve investment returns regardless of whether the market goes up, remains flat, or even falls slightly, could be an attractive opportunity.”

He continued: “Markets don’t like uncertainty, and so it is understandable that investors are going to consider, perhaps more than normal, the potential impact of leaving the EU on the FTSE in the medium term. Since the market can fall up to 40% before your initial investment is at risk, defensive plans also offer some capital protection against a falling market, and allow potential investors to consider the risk versus reward of the plan prior to investing, which could be appealing in the current investment climate.”

 

More information on the Investec FTSE 100 Defensive Kick Out Plan »

More information on the Focus FTSE Defensive Kick Out Plan »

More information on the Investec FTSE Defensive Growth Plan (ISA only) »

Click here to compare defensive 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.

Tax treatment 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.

These 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. 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.