Archive for the ‘Fixed rate’ Category

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.

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.

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.

Compare our summer’s most popular savings and investment ideas

Compare our current accounts »

Compare instant access accounts »

Compare fixed rate bonds »

Compare fixed income investments »

Compare higher yield, variable income plans »

Compare defensive growth investments »

 

* 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.

FTSE income plans compared: offering up to 8% income

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Despite the latest fall to the headline rate of inflation, the rate is still well over the bank of England’s 2% target, and there is no guarantee that it will continue to decline over the next six months and beyond. The need for income is one of the most common demands put on our capital, and whilst there is not one traditional fixed rate savings account that offers an interest rate that is able to match inflation, income seekers are still faced with the toughest of challenges. To this end, we compare a selection of income investment plans, offering both the opportunity for a high level of income, as well as some capital protection against a falling stock market.

Is today’s inflation fool’s gold?

Inflation figures eased last month for the first time in 2017, dropping from 2.9% in May to 2.6% in June, according to the Office of National Statistics (ONS). However, this dip in inflation could be short lived, with a number of UK economic analysts predicting that inflation could reach upwards of 3% by the end of 2017. This could spell bad news for savers, as the current crop of fixed rate bonds only offer interest rates that fail to match today’s rate of inflation. Effectively, this means that many savers are losing money in real terms.

Income plans offer to counter inflation

The gap between interest rates and inflation has produced a greater demand for financial products that provide the opportunity to combat the effect of inflation on one’s capital. We therefore compare four investment plans which between them offer up to 8% income, the opportunity for regular income payments, as well as some capital protection against a falling stock market.

Features in common

The income plans under the spotlight here are the FTSE 100 Defensive Income Plan from Investec, the FTSE 100 Enhanced Income Plan from Investec, the FTSE Daily Accrual Income Kick Out Plan from Mariana and the FTSE Monthly Contingent Income Plan from Meteor.

All four plans have a number of features in common:

FTSE linked

Apart from the Enhanced Income Plan which pays a fixed income, the level of income you receive is dependent on the performance of the FTSE 100 Index (‘the Index’ or ‘the FTSE’), whilst the return of your initial capital for all of the plans is dependent on the FTSE.

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. Since the historical volatility is familiar to many investors, they are in a better position to consider the pros and cons of each plan within the context of the underlying investment and the potential income on offer.

Fixed term

All the plans have a fixed term, which varies depending on the investment. The FTSE 100 Defensive Income Plan requires an 8 year commitment, and the FTSE 100 Enhanced Income Plan has a term of 5 years. Both the FTSE Daily Accrual Income Kick Out Plan from Mariana and FTSE Monthly Contingent Income Plan from Meteor have a term of 10 years. The fixed term may well appeal to those who need to know exactly how long their capital will be invested for and who could benefit from planning around this.

Kick-out opportunity

All of the plans except the Enhanced Income Plan have the ability to mature early or ‘kick out’, which is also dependent on the FTSE. The Defensive Income Plan and the FTSE Monthly Contingent Income Plan will mature early 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. Alternatively, the FTSE Daily Accrual Income Kick Out Plan has the ability to mature early after the first year and quarterly thereafter, in the event that the FTSE has gone up by 10%.

Therefore, should the FTSE go up by the required amount in the future, investors receive both a final income payment as well as a full return of their original capital, allowing further investment opportunities to be considered at that time.

Regular income payments

All four plans offer a regular payment frequency. The FTSE 100 Defensive Income Plan and FTSE Daily Accrual Income Kick Out Plan both offer quarterly income payments, the FTSE Monthly Contingent Income Plan offers monthly income payments and the FTSE 100 Enhanced Income Plan provides fixed monthly income payments. The mixture of monthly and quarterly income payments on offer provides options to a wide range of potential investors.

Up to 8.0% annual income

These plans are designed for investors looking for a high level of income, with a maximum annual income of between 4.35% and 8.04%. Where the four plans differ is the level that the FTSE has to be in order to achieve these favourable returns, and so an investor’s selection will heavily depend on what they think may happen to the FTSE in the coming years. Fortunately, the plans accommodate a number of different possibilities.

8.04% income if the FTSE does not fall more than 15%

Option 2 of the FTSE Monthly Contingent Income Plan from Meteor offers a monthly payment of 0.67% provided the FTSE, at the end of each month, has not fallen by more than 15% from its value at the start of the plan. Option 2 of the FTSE 100 Defensive Income Plan 1 from Investec offers a quarterly payment of 2% (equivalent to 8.0% per year) provided the FTSE, at the end of each quarter, has not fallen by 20% or more from its value at the start of the plan.

6.60 % income if the FTSE does not fall more than 25%

The FTSE Daily Accrual Income Kick Out Plan from Mariana offers up to 6.60% each year, with a 1.65% income payment made at the end of each quarter provided the FTSE 100 Index, on each business day during the quarter, closes at or above 75% of its value at the start of the plan. This means that the index can fall up to 25% throughout the quarter and the full income payment would still be made. If the FTSE falls more than 25% on any business day then income would not accrue for that day.

6.0 % income if the FTSE does not fall more than 30%

Option 1 of the FTSE Monthly Contingent Income Plan from Meteor offers a monthly payment of 0.5% provided the FTSE, at the end of each month, has not fallen by more than 30% from its value at the start of the plan.

6.0 % income if the FTSE does not fall more than 40%

Option 1 of the FTSE 100 Defensive Income Plan from Investec offers quarterly payments of 1.5% provided the FTSE, at the end of each quarter, has not fallen by 40% or more below its value at the start of the plan.

4.35% income regardless of the performance of the FTSE

The FTSE 100 Enhanced Income Plan offers a monthly payment of 0.3625%, paid to you regardless of the performance of the Index. Although this plans offers the lowest headline yield, it is the only one to offer a fixed income payment each and every month plan for the full fixed term.

Provisional capital protection

One of the unique features of this type of investment plan is that each contains some form of conditional capital protection – this means the FTSE has to fall by more than a fixed percentage (known prior to investing) before your capital is at risk. For all four plans, the percentage is 40% below its value at the start of the plan, which is measured at the end of the investment term only. If it does fall below this level, your capital is reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.

Fair Investment conclusion

Commenting on the current range of FTSE based income plans, head of savings and investments at Fair Investment Company, Oliver Roylance-Smith said: “The potential to achieve an income that beats inflation (after tax and charges), and which leaves the value of your initial investment untouched, has to be a goal for many an income investor, otherwise your capital is losing money in real terms.”

He continued: “As inflation continues to put so much pressure on both savers and investors alike, the ability to achieve up to 8% income whilst offering some capital protection is likely to appeal to wide range of investors, whilst the fixed income on offer from the Enhanced Income Plan continues to make it our best selling income plan.”

 

Click here for more information on Investec’s FTSE 100 Defensive Income Plan »

Click here for more information on Investec’s FTSE 100 Enhanced Income Plan »

Click here for more information on Meteor’s FTSE Monthly Contingent Income Plan »

Click here for more information on Mariana’s FTSE Daily Accrual Income 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 legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.

These are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. Income payments are not guaranteed and 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.

Fixed rate Head to Head: National Savings and Investments Growth Bond versus Investec Income Plan

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On 11th April, National Savings and Investments (NS&I) launched the Investment Guaranteed Growth Bond (the NS&I Bond), as announced by the Chancellor in the last Budget. Offering a market leading fixed rate, this bond has been eagerly awaited and offers an attractive option for savers.  However, whilst savings rates overall continue at their historical lows, it is also understandable why some are choosing to consider moving up the risk spectrum in the hunt for higher fixed returns. With this in mind, here we offer a fixed rate head to head, as we compare the pros and cons of this market leading NS&I fixed rate bond with the market leading fixed rate investment.

Fixed rate bond

Capital protected fixed rate bonds have for some time been a cornerstone of many a saver’s portfolio. Probably the main reason is that they offer a fixed rate of interest, known at outset and which is normally paid for a fixed term, so you know exactly how much you will receive, when and for how long. Provided the bank remains solvent, your capital is also protected and returned to you in full at the end of the fixed term.

Fixed savings rate reality check

Despite the obvious appeal of a fixed return from our capital, the popularity of the fixed rate bond has been diminishing in line with the general trend of falling savings rates. This is particularly pronounced in the last five years, for example in April 2012, you could secure a one year fixed rate paying you 3.50% AER, and a five year offering 4.40% AER fixed. Now the top savings rates over the same terms are in the region of 1.50% and 2.15%, equivalent to falls in interest of 57% and 51% respectively.

These significant drops have not gone un-noticed, perhaps best illustrated by the increased use of the Stocks & Shares ISA over the Cash ISA we have seen in recent years, as interest rates available on the latter have declined substantially and so more savers consider taking on more risk in the hunt for higher returns.

Fixed rate investment

The need for a fixed and regular income is as strong as it is ever has been, however it is also the case that most investments only offer a variable income, and therefore do not offer the predictable income stream that is so important to many who are considering what to do with their capital. But although investments generally offer a variable income, our best selling income investment plan does offer a fixed return, which perhaps helps to explain why the FTSE 100 Enhanced Income Plan from Investec Bank (the Investec Plan) has been so popular.

NS&I versus Investec

The most important difference between these two products is their treatment of your initial capital. Your investment into NS&I’s Bond is fully protected by HM Treasury, and so is returned to you at the end of the term, regardless of any other market factors. Investec’s Plan however, not only relies on the bank’s solvency in order to return your capital at the end of the investment term, but this is also dependent on the performance of the FTSE 100 Index, and so your capital is at risk.

We will now take a closer look at the key features of these two market leading fixed rates:

Fixed term

Both products have a fixed term. The NS&I Bond has a fixed term of three years whilst the Investec Plan is fixed for five years. Fixed terms often appeal to those who wish to plan around this and combined with a fixed rate, offer the peace of mind of knowing exactly what will be paid and for how long.

Fixed rate

The NS&I Bond pays a fixed rate of 2.20% AER, which is significantly higher than the next best three year fixed rate on the market (currently 1.91% with OakNorth Bank) and is more in line with the best longer term fixed rates with a term of five years or more. The latest issue of the Investec Plan offers an annual income of 4.56%, which is more than double that offered by the best capital protected fixed rate option available.

Payment frequency

Another important feature of fixed rate products is how often the interest is paid, and where it can be paid, especially for those looking to supplement their income. Interest on the NS&I Bond is paid annually and can only be added to the bond, whilst interest on the Investec Plan is paid monthly into a bank account of your choice. Monthly income is often cited as the most popular option since it is the most useful in terms of budgeting, and can be attractive when looking to supplement existing income or boost retirement income from your capital.

Interest payments

Interest on both accounts is paid to you gross. Interest from the NS&I Bond and any non-ISA investments into the Investec Plan will be subject to UK tax and will count towards your Personal Savings Allowance. New ISA investments or ISAs transferred into the Investec Plan will not be subject to tax.

Minimum/maximum contributions

Both plans only accept lump sum contributions. The minimum into the NS&I Bond is only £100, but perhaps the biggest limitation to the product is that it is restricted to a maximum balance of £3,000 per person. Investec’s Plan on the other hand has a minimum contribution of £3,000, which may be on the high side for some, but with a maximum investment limit of £1m, should cater for investors looking for a high fixed income.

Early closure

You can withdraw your money from the NS&I Bond before the end of the term but a penalty equal to 90 days’ interest will be deducted on the amount you cash in. The Investec Plan also includes the option to withdraw your money early however the value you receive will be a market value which is based on how long your investment has been running as well as market conditions at the time of cashing in. This could result in you getting back less than you originally invested and so this plan should be considered a fixed term investment, and only taken out if you do not need access to the capital for the next five years and accept the risk to your capital.

ISA option

The NS&I Bond does not accept ISA investments whilst the Investec Plan accepts both new ISAs and ISA transfers. Although the Personal Savings Allowance removes the tax liability on the interest earned for most savers, there are still a significant number of Cash ISA savers with accounts paying little or no interest, and with very poor returns on offer by the current range of fixed rate Cash ISAs. This could therefore be considered a viable option by utilising the ISA transfer, as well as new ISA investments up to the new £20,000 ISA allowance. ISA interest does not count towards the Personal Savings Allowance because it’s already tax-free. Please remember that your capital is at risk with the Investec Plan.

Offer period

The NS&I Bond launched on 11th April 2017 and accounts can be opened for 12 months from launch, with applications being accepted up to 10th April 2018. Investec’s current issue opened on 18th April with a closing date of 5th May for ISA transfers, and 26th May for new ISAs and non-ISA investments. The Investec Plan is now in its 34th issue and since its launch, a new issue has started immediately after the end of the previous issue.

Treatment of capital

Any investment into the NS&I Bond is fully capital protected and so will be returned to you at the end of the three year term. The Investec Plan puts your capital at risk, with your initial investment only being returned provided the FTSE 100 Index does not fall by more than 50% during the term of the plan. So although the plan does contain some protection against a falling stock market, if it does fall by more than 50%, and also finishes the fixed term lower than its value at the start of the plan, your initial investment will be reduced by 1% for every 1% fall, so you could lose some or all of your initial investment.

Credit risk & compensation scheme

Since the repayment of your investment into the NS&I Bond is backed by HM Treasury (as opposed to a normal bank deposit falling within the limits of the FSCS), the account is considered to be 100% secure. Any investment into the Investec Plan is reliant on the bank remaining solvent for the duration of your investment since otherwise you could lose any future returns as well as some or all of your initial capital. This means its credit rating becomes an important consideration and since it is not a deposit, any investment would not be covered by the FSCS for default alone.

Compared to inflation

The current rate of inflation is 2.3%, as measured by the Consumer Price Index. There has been an increasing threat of inflation rising further in the coming months and based on the number of savings accounts which fail to match or beat inflation, this is a genuine concern.

At 2.20% AER, the NS&I Bond fails to match inflation whilst the Investec Plan offers almost double the current rate of inflation. This higher level of income is the upside for putting your capital at risk, however, if the FTSE falls by more than 50%, you could lose some or all of your initial investment.

Fair Investment conclusion

Commenting on these market leading fixed rate options, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company, said:

“Both options pay a fixed rate for a fixed term, regardless of the performance of the stock market, so the investor has the certainty of knowing at the outset exactly how much they will receive, when and for how long. When considering any sort of fixed rate product, it is imperative that the risks of each are fully considered and understood before committing, whether this is inflation risk, risk of capital loss or credit risk. This is in addition to the key features of the product such as the level of income on offer, how frequently it is paid and the minimum/maximum contribution levels.

He continued: “The NS&I Bond clearly offers a stand out rate when compared with other fixed rate bonds in the market of similar duration, so this in itself will make it popular. The main downside is the maximum contribution level of £3,000 so the additional interest earned from the higher rate will be relatively small. With the level of savings rates on offer across all fixed terms, there is a great deal of pressure on savers to consider alternatives and the Investec Plan is our best selling income investment, not least because it pays a fixed income which is unusual for an investment. The monthly payment frequency is also a popular feature, however in return for the high level of fixed income, your capital is at risk.”

 

The Investec FSTE 100 Enhanced Income Plan is now available for ISAs, ISA transfers and non-ISA investments, with a minimum investment of £3,000. Click here to find out more »

The NS&I Investment Guaranteed Growth Bond is now available to invest in online (non-ISA only), with a minimum investment of £100 and a maximum of £3,000. Click here to find out more »

 

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. Fair Investment Company does not offer advice and any investment transacted through us is on a non-advised basis. 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 Investec Enhanced Income Plan is a structured investment plan which 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 their future performance.

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.

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

NEW 5 year term – ISA fixed income best seller just got better

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With just over 5 weeks until the end of the tax year, now is the time to make sure you maximise your ISA allowance for the current 2016/17 tax year, before it is lost forever. So what better timing than for our best selling income plan to not only offer an enhancement to its product terms by reducing the fixed plan term from six years to five, but also to offer a Double ISA option whereby you can arrange the next tax year’s (2017/18) £20,000 ISA allowance as well. The appeal of a fixed income remains as strong as ever, whilst the ability to generate a high fixed income from capital remains limited. So here we take a quick look at the main features of the Investec FTSE 100 Enhanced Income Plan and what we expect will be a very popular plan this ISA season.

Income best seller

Whether you are working full-time or part-time and need to supplement your earnings, or retired and looking at ways to supplement your pension or savings income, the need for income is one of the most common demands put on our capital. Rather uniquely in the income investment space, this plan combines a high fixed income, with a fixed term and some degree of capital protection. These features have made it our best-selling income investment plan and a popular choice for our ISA investors.

High fixed income

Traditional investment funds normally pay a variable income dependent on the performance of the underlying asset, whereas this plan pays a fixed income regardless of the performance of the stock market. The current issue of the plan is paying 5.04% per year fixed, which means that the investor has the certainty of knowing from day one exactly how much they will receive. With longer term savings rates still at very low levels, the prospect of a high fixed income is likely to be attractive to a wide range of income seekers.

Monthly payments

Another popular feature is the monthly payment frequency since this is the most useful in terms of budgeting, especially when many UK equity income funds only offer quarterly payments. Therefore, not only does the investment provide a high level of fixed income, but it also pays this on a monthly basis, which could be an important feature when looking to supplement existing income. At 5.04% per year on offer from the latest issue, this equates to 0.42% paid each and every month for the entire term of the plan.

NEW 5 Year fixed term

The Enhanced Income Plan was first introduced in January 2013 and since its launch, the plan has always had a six year term. For this latest issue, Investec has been able to reduce the term to five years. This makes it the only income investment plan currently on offer with a five year term and although you do have the option to withdraw your money early, the plan is designed to be held for the full term and early withdrawal could result in you getting back less (or more) than you invested.

Some capital protection from a falling market

Unlike a traditional investment fund, the plan includes some capital protection from a falling stock market. This ‘conditional capital protection’ means that the return of your initial investment is conditional on the FTSE 100 Index not falling by more than 50% below its value at the start of the plan. If the FTSE stays above this 50% barrier throughout the plan term, you will receive a full return of your original investment when the plan ends.

Capital at risk

However, if the FSTE 100 Index does fall by more than 50% at any time during the plan term, and is also below its starting value at the end of the five year term, your initial investment is reduced by 1% for every 1% fall. Therefore this plan puts your capital at risk and you could lose some or all of your initial investment.

The use of averaging

When calculating the final level of the FTSE for the purposes of comparing it with its value at the start of the plan, the plan takes the average of the closing levels of the Index on each business day during the last 6 months of the plan term. 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 increases in the market during the last six months of the plan.

Investment plans

This plan is a structured investment and so unlike investing in a fund where you would buy units at the prevailing price on the date of purchase, your initial capital is used to purchase securities issued by Investec Bank plc. These securities are structured in a way so that they aim to provide the fixed income and the return of capital as described above, and means that Investec Bank plc’s ability to meet their financial obligations becomes an important investment consideration. If the bank fails or becomes insolvent, this could affect both the payment of any future income, as well as the return of your original investment and you would not be covered by the Financial Services Compensation Scheme for default alone.

Investec credit rating

Fitch is one of the main global credit rating agencies and has awarded Investec Bank plc a credit rating of BBB with a stable outlook (awarded 3rd October 2016). The ‘BBB’ rating denotes a good credit quality and indicates that expectations of default risk are currently low and that Investec Bank plc’s capacity for payment of its financial commitments is considered to be adequate but adverse business or economic conditions are more likely to impair this capacity. The stable outlook indicates that the rating is not expected to change in the short to medium term, i.e. in the next 6 months to 2 years.

Investec Bank plc profile

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 2016, look after £121.7 billion of customer assets. They provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their banking operation looks after £24.0 billion of customer deposits and they are also a market leading provider of investment plans and structured deposits in the UK.

Double ISA option

The current issue of the plan includes Double ISA functionality which means you can invest your ISA allowance for both the current tax year (2016/17) and the next tax year (2017/18) at the same time, using a single application form. The ISA allowance for the current tax year is £15,240, and for the 2017/18 tax year (starting 6th April 2017) it increases to £20,000. This means you could invest up to £35,240 into the Enhanced Income Plan, achieving a tax free income of £1,766 per year (£148 per month). Please note that application deadlines apply.

Fair Investment view

Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “Whilst longer term fixed rates on cash remain where they are, the pressure is clearly on to in terms of how we generate income from our capital, but also to think carefully before moving up the risk spectrum in the hunt for higher returns. Needless to say that the high level of fixed income and monthly payment frequency on offer from this plan are attractive features, whilst many fixed rate savers will be used to a fixed term which should also appeal to those investors who wish to plan around this.”

He continued: “By combining a fixed income with the criteria which need to be met before your capital is at risk, this plan allows potential investors to weigh up the risk versus reward prior to investing. In addition to paying a high fixed income rather than a variable income based on the performance of the stock market, and this plans sits very much on its own as an option for tax free income seekers.”

 

The plan is open for new ISA investments for the 2016/17 tax year (£15,240 allowance) and the 2017/18 tax year (£20,000 allowance), Cash ISA and Stocks & Shares ISA transfers, as well as non-ISA investments. The minimum investment is £3,000.

 

Click here for more information about the Investec FTSE 100 Enhanced 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.

This investment does not include the same security of capital that is afforded to a deposit account. Your capital is at risk.

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.

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.

Savings Focus: Masthaven Bank launches with some market leading fixed rate bonds

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Last updated: 14/02/2017

Masthaven Bank is the latest bank to launch a range of fixed term deposits to the UK retail market and based on its initial range of products, looks set to be a real challenger, even amongst the challenger banks. So, if you have a minimum of £500 that you can tie up for at least 6 months, and you want to take advantage of some of the highest savings rates on the market, their first tranche of products is certainly worth reviewing. Here we take a closer look at what the bank has to offer savers.

Lending history

Masthaven is a brand new bank and the first new bank to be awarded a banking licence in 2016. However, they are not completely new to lending. Since 2004, they have been providing a flexible and personalised approach to lending in the specialist areas of bridging loans and secured lending (second charge mortgages), areas in which they remain one of the most competitive propositions in the market.

UK based fixed rate savings accounts

Headquartered in London, and with a knowledgeable and experienced team of savings specialists based in their UK contact centre, they have just launched their retail banking arm with a highly competitive range of fixed term and flexible term fixed rate savings accounts.

Masthaven Bank Fixed Term Bonds – up to 2.06% AER

Masthaven Bank’s fixed rate savings accounts are aimed at savers who are able to tie their money up for a fixed period, and are also looking for a fixed and regular rate of interest. They have four fixed term products, with terms ranging from 1 year to five years, and as you would expect, the rate of interest available increases with the length of term you choose: their 1 Year Fixed Term Bond pays 1.25% AER, whilst their 5 Year Fixed Term Bond offers a market leading 2.06% AER.

Summary of Fixed Term Bond rates

A summary of Masthaven’s fixed term bond rates is as follows:

  • 1 Year Fixed Term Bond:     1.25% AER
  • 2 Year Fixed Term Bond:     1.58% AER
  • 3 Year Fixed Term Bond:     1.76% AER
  • 5 Year Fixed Term Bond:     2.06% AER

Click here for more information on the Masthaven Fixed Term Bonds »

Masthaven Flexible Term Saver – create your savings account

Masthaven also offers the option to choose your own term, with their Flexible Term Saver. Terms can be selected in whole months, ranging anywhere between 6 months and 60 months, with rates between 0.60% AER and 1.96% AER respectively. This means you can tailor to the month the exact term you want, whilst also benefitting from a top rate of interest which is fixed for term of the account.

The Flexible Term Saver is an innovative account designed for customers who may be saving for a key event, such as a holiday of a lifetime, a wedding, university fees or a deposit for a house. The flexibility around term choice allows you to create a savings account based on your own needs and timeframes, so that you take advantage of a fixed interest rate but without having to sacrifice a competitive rate of return. Example interest rates are as follows:

  • 15 Month Flexible Term Saver:     1.33% AER
  • 18 Month Flexible Term Saver:     1.42% AER
  • 30 Month Flexible Term Saver:     1.67% AER
  • 48 Month Flexible Term Saver:     1.91% AER

See rates and find out more about the Masthaven Bank Flexible Term Saver »

How much can you save?

All Masthaven savings accounts have a minimum balance of £500 and a maximum balance of £250,000 per account. You may have as many savings accounts with them as you want at any one time, however there is a maximum total balance of £1,000,000 that can be held across all of their savings accounts. Any funds held jointly will count towards each of your own individual limits.

Interest

Interest will be calculated from the day on which you make your deposit and is calculated daily based on the funds held in your account. You can have interest paid either monthly or annually and importantly, interest can either be paid into an account of your choice, or added to the balance of your fixed rate bond account, in which case you can benefit from compound interest. Interest will be paid to you gross, without tax deducted.

Account set up

Each account can be set up as a single or joint account. Accounts are opened online and access to account information is online or via telephone. As with most fixed term accounts, no early withdrawals are permitted.

Financial Services Compensation Scheme

Masthaven Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority. As a UK regulated bank your deposits are protected up to £75,000 by the Financial Services Compensation Scheme (‘FSCS’). For further information about this protection you can read ‘How FSCS protects your money’ or you can visit the FSCS website.

The UK’s only owner-managed bank

Masthaven Bank was awarded the first 2016 retail banking licence back in April, and launched officially on 28th November with the suite of fixed term savings accounts detailed above. It aims to offer an alternative to the one-size-fits-all approach of many conventional banks, and is the UK’s only owner-managed challenger bank with a partnership model which at launch sees 80% of employees already shareholders in the business.

The Board of Directors is as follows:

  • The Chairman is Peter Harrison, ex-CEO of the UK Financial Services Practice at KPMG, Chairman of the Audit Committee of a FTSE 250 Company and ex-Chair of the Audit Committee for CIT Bank Ltd.
  • Andrew Bloom is CEO. After working for KPMG and Strand Hanson he founded Masthaven Finance in 2004. Andrew has built Masthaven into an award-winning mortgage, development finance and bridging finance provider.
  • Managing Director is Jon Hall who joined the business in December 2014. Previously Mr Hall was Chief Executive of Saffron Building Society where he grew the mutual’s ranking from 31st to 13th largest in the UK and the largest in Eastern England.
  • Three Non-Executive Directors join Masthaven’s Board: Anne Gunther, previously Chief Executive of Norwich & Peterborough Building Society and Standard Life Bank; Ashley Machin, who most recently was Chief Digital Officer at TSB Bank and Michael Baker, FD of Joint Ventures at the William Pears Group.

Access to this expert leadership team along with a strong team of support staff approaching 100 in number, combined with straightforward digital services, means Masthaven will offer what it calls human digital banking.

Click here to compare all Masthaven Bank fixed rate savings accounts »

 

Please note that Masthaven Bank fixed rate bonds are fixed term products which means you cannot withdraw your funds or close your account until the end of the agreed term.

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

Fixed rate bond holders face significant falls: our roundup of the latest fixed rate options

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Last updated: 17/01/2017

For those bond holders with maturing accounts, many are facing significant falls in the level of returns on offer when comparing their maturing account with the current crop of fixed term deposits on offer, especially those coming out of four or five year fixed rate bonds. And yet despite this low interest rate environment, fixed rate bonds continue to play an important role for many savers. With this in mind, we give you a roundup of our latest fixed rate bond offers, as well as take a look at some of our most popular alternatives.

Fixed rate bonds a popular choice

With interest rates looking set to continue at their record lows for some time to come, and whilst top instant access accounts only offer around 1.0% AER, savers looking for the certainty of knowing exactly how much they will receive, when and for how long, still look towards the fixed rate bond which remains a popular choice for those wanting to combine a fixed return with full capital protection.

Short term: up to 2 years

Fixed rate bonds

For those looking at the shortest fixed terms, Habib Bank offer a 6 Month Fixed Rate Deposit paying 0.80% AER, whilst new entrants Zenith Bank and Masthaven Bank offer 1.30% AER and 1.35% AER respectively if you can tie your money up for a year with their 1 Year Fixed Term Deposit. Minimum deposits start as low as £500 and your deposits are eligible for the Financial Services Compensation Scheme (FSCS). Interest is paid at maturity and as is standard with most fixed term deposits, no withdrawals are permitted during the term of the bond. Zenith Bank also offers a top rate of 1.52% AER if you fix for 2 years with their 2 Year Fixed Term Deposit account, with deposits available from £1,000, whilst Masthaven’s 2 Year Fixed Term Bond is slightly more competitive at 1.53% AER with a £500 minimum balance.

Fixed rate Cash ISAs

Bank of Cyprus UK offer market leading rates in this category, with their 1 Year Fixed Rate Cash ISA paying 1.05%, and marginally higher at 1.10% AER if you want to fix for 2 years, both with a low minimum deposit of just £500. These accounts are available to anyone aged 16 or over and interest is paid annually into your Cash ISA. ISA transfers are permitted and eligible deposits are covered by the UK FSCS. Aldermore Bank offers a market leading 1.20% AER on their 2 Year Fixed Rate Cash ISA but the minimum is slightly higher at £1,000. Aldermore Bank is the five time winner of the Consumer Moneyfacts ISA Provider of the Year Award (2011-2015).

Medium term: 3 to 4 years

Fixed rate bonds

In the three to four year space, our top deal comes from the new kid on the block, Masthaven Bank, and their 3 Year Fixed Term Deposit, currently paying 1.67% AER. The minimum deposit is £500 and interest can be paid monthly or annually. For those looking specifically for monthly interest, United Bank UK’s 3 Year Fixed Term Deposit pays a slightly lower rate of 1.55% AER, but also offers a monthly interest option, in addition to having it paid annually or at maturity. No withdrawals are permitted from these accounts.

Leading our tables over 4 years is Vanquis Bank offering 1.85% AER and Masthaven Bank offering 1.84% AER with their 4 Year Fixed Term Bond, for those with between £500 and £250,000 to deposit. Both accounts have annual or monthly interest options, but no withdrawals are permitted during the term. Accounts can be opened in sole or joint names.

Fixed rate Cash ISAs

Bank of Cyprus UK continues to be very competitive in the fixed rate Cash ISA market with their 3 Year Fixed Rate Cash ISA, currently paying 1.20% AER and with a respectable minimum deposit of just £500. Aldermore are offering a higher rate of 1.25% AER fixed over 3 years with their 3 Year Fixed Rate Cash ISA whilst both of these accounts allow you to transfer in existing ISAs from other providers, and can be set up easily online.

Longer term: 5 years+

Fixed rate bonds

Although the highest rates are still rewarded with higher savings rates in return for locking your money away for longer, the interest rate gap between short term and longer term is also at record lows. For those prepared to commit their savings for five years, Vanquis Bank’s 5 Year Fixed Rate Bond is paying 2.00% AER with a minimum deposit is £1,000 whilst Masthaven Bank’s 2.01% AER is currently market leading and interest can be paid monthly or annually.

Fixed rate bond holders facing significant falls

Just over a year ago we were talking about savings rates of around 2.10% for a 1 year fixed rate, 2.35% for a 2 year fixed whilst a 3 year would get you 2.70% AER fixed. Our best rates above will earn you 1.35%, 1.53% and 1.61% AER respectively, equivalent to reductions of between 35% and 40%. And the situation is even worse for longer term bond holders. We have many customers who are coming out of five year fixed rates where the rate on offer was around 4.60%. Now, they are looking at 2.01% as the market leading five year fixed rate, a significant reduction in interest of 56%. For someone with a maturing lump sum of £50,000, this is equivalent to their income dropping from £2,300 per year to £1,005.

Investing for fixed income

It is therefore perhaps unsurprising that many fixed rate savers have had to consider a wider range of options than ever before in the search for higher levels of income, and in doing so this inevitably involves considering investments and the associated risk to your capital. One of the main issues facing those in this situation is that most traditional income investments only offer a variable income, and so comparing with a fixed rate bond can be more difficult. This is perhaps one reason which helps to explain why the Enhanced Income Plan from Investec has been such a popular plan with our customers.

Fixed income, fixed term

The plan offers a fixed income, which is paid to you regardless of the performance of the stock market, whilst the investment also has a fixed term, so you know exactly how much you will be paid and for how long. The current issue offers 5.04% fixed income each year, which is paid as 0.42% each month.

In addition to offering a fixed income, this plan is different to most investment funds in that is also offers some capital protection against a falling stock market. Known as conditional capital protection, this means that your original investment is retuned in full unless the FTSE 100 Index falls by more than 50% during the plan term. If it does, and also finishes the fixed term lower than its value at the start of the plan, your initial investment will be reduced by 1% for every 1% fall, so you could lose some or all of your initial investment.

The Enhanced Income Plan is also available as an ISA and accepts ISA transfers with a minimum investment of £3,000.

Cash versus investment – understand the risks first

One of the main differences between the fixed rate bond and the fixed income investment is that with the former, your capital is treated as a deposit and is therefore protected and returned to you at the end of the term, subject to the bank in question remaining solvent. You also have access to the deposit protection available from the UK FSCS.

An investment into the Enhanced Income Plan is used to purchase securities issued by Investec Bank plc, which means the bank’s ability to meet and repay their financial obligations is equally an important consideration. However, since this is not a deposit, you are not eligible for compensation under the FSCS for default alone, and as highlighted above, the return of your capital is also dependent on the performance of the FTSE 100 Index and so is at risk.

Risk v 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 timeframe, and then consider whether you are prepared to accept the level of risk to your capital in return for the higher fixed rate.

Our best five year fixed rate is currently offering 1.90%. By accepting risk to your capital, the Investec plan offers 5.04% over six years, thereby offering more than two and half times the level of income each year. The main risk is that your capital is at risk if the FTSE 100 Index falls below 50% and so once you have understood how the plan works, the decision then is whether you are comfortable with putting your capital at risk in return for the higher fixed return on offer.

 

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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.

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 Investec Enhanced Income Plan is a structured investment plan which 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.

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