Archive for the ‘Savings rates’ Category
Last month, the Bank of England raised their base rate for the first time in more than ten years, and by doing so opened the door to increased monthly costs for many homeowners. What’s more, at the time of writing inflation continues to sit at a five year high of 3%, which means that the cost of living has more than trebled in the last 12 months. These two factors alone combine to create additional strains on the average UK household, and a situation which may influence some to reconsider their financial position. We take a look at what the latest Bank of England base rate and inflation might mean if you are looking to re-think your savings and investments.
UK inflation, as measured by the Consumer Price Index (CPI), remained at its five year high of 3% for the second month in a row, according to the latest report released by the Office of National Statistics. And despite this being a full one per cent over the Bank of England’s target of 2%, it is also widely predicted that inflation will increase again before the year’s end.
Base Interest Rate Hike
Approximately 15 months after cutting their base rate of interest to emergency levels, the Bank of England’s Monetary Policy Committee voted on November 2nd to increase the interest rate from 0.25% to 0.5%. The move represents the first increase for ten years and has had a knock-on effect with homeowners, as a number of high street banks have since increased their standard variable and tracker rates, thereby increasing the cost of living for many.
No doubt we will see more lenders follow suit this month, and the combination of increased mortgage interest rates and high inflation means less disposable income for households, making it harder for the average UK household to make ends meet, let alone put enough money into their savings.
Not Passed On To Savings Accounts
There was a general consensus among economists that the Bank of England would raise their base rate before the end of the year, and so even before the Monetary Policy Committee voted in favour, there had been much discussion on both the advantages and disadvantages of a potential increase.
The most common advantage given in support of an interest rate hike was that it would likely increase the savings rates offered by banks, a welcome change for savers who have had to face year after year of some of the lowest savings rates on record. Unfortunately, although banks have been quick to raise their mortgage interest rates following the hike, the majority of banks have not done the same for their savings accounts – a real ‘lose / lose’ for both borrowers and savers alike.
Savings Accounts At A Glance
Savings rates therefore continue to under-deliver. A review by Simply Savings of the savings rates currently on offer shows rates of around 1.30% AER on instant access; 1.80% AER and 2.05% AER for one and two-year fixed rates respectively, around 2.25% AER for a three-year fixed rate and 2.37% AER if you fix for five years. Therefore, savings accounts do not come close to matching inflation, let alone beating it, meaning savers are still losing money in real terms, even if you are able to tie your money up for five years.
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Do your homework
Whenever considering changing strategy, it is important to do your homework. This means comparing the amount of interest you already receive with what is currently available in the market. If you are not receiving anything close to the above rates, a change may be worthwhile, and remember, despite the fact that savings accounts do not provide rates that counter the effects of inflation, they do offer full capital protection.
If you are not prepared to take on more risk to potentially access higher interest rates, then there are not many alternatives available on the market.
Taking On Risk Or Losing Money In Real Terms
For the entire time that the interest paid on your savings is less than the prevailing rate of inflation (and that’s after any tax has been taken into account), the value of your money is going down in real terms, and the longer this goes on, the more an impact it will have. It may well therefore be time to start re-evaluating your strategy when it comes to savings, as you would have to receive a significant return in the current climate just to match inflation.
With the added financial pressure brought about due to higher inflation, it may force us to consider investing in order to try and keep up with the cost of living. We are then faced with the conundrum of whether to take on more risk in order to achieve potentially higher returns, versus record low interest rates but without the risk to our capital.
Capital at Risk Products
Capital at risk investment plans offer a defined return for a defined level of risk. Combined with a fixed or maximum term, they therefore offer potential investors a clear trade-off between risk and reward, hereby enabling them to be compared with alternative options.
When you invest in a capital at risk investment plan, although your capital is not directly invested into the stock market, their returns are generally linked to the performance of the FTSE 100 Index (‘FTSE’ or ‘Index’). The returns for a capital at risk product are often dependent on whether the FTSE stays or ends above a certain level, for example a fix growth or income payment provided the FTSE ends a plan year higher than its value at the start of the plan.
Income Investment Plan Example
An example of one of the most popular income investment plans is the FTSE 100 Defensive Income Plan from Investec Bank, which provides investors with the opportunity to receive 7.25% interest each year provided the FTSE has not fallen by 20% or more at the end of each quarter. The plan has a second investment option offering 5.50% per year provided the FTSE does not fall by 40% or more.
Unlike deposit based savings products, this plan puts your capital at risk and if the FTSE has fallen by more than 40% at the end of the six-year term, you could lose some or all of your initial capital. Also, since it is an investment rather than a deposit-based plan, your initial capital is not covered by the Financial Services Compensation Scheme for default.
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Risk v Reward
As with any investment, it is important to give full consideration of the risk versus reward on offer. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe, and then consider whether you are prepared to accept the level of risk to your capital in return for either a higher fixed rate, or the potential for a higher variable income.
In the example above, the potential income on offer is either 5.50% or 7.25% depending on how much the FTSE can fall each quarter. The best fixed rate on offer over a similar timeframe is in the region of 2.50%, so one of the questions to ask is whether the ability to receive around 2 to 3 times more interest is sufficient potential reward for putting your capital at risk if the FTSE falls 40% or more?
There is little doubt that higher inflation and an increase in the Bank of England’s interest rate has put increasing financial pressure on households in the UK. With a reduction in the amount of disposable income for many, uncertainty around future wage growth and no direct uplift in savings rates, one could argue that for those with mortgages, unless you can secure a savings rate higher than your mortgage rate, you should be paying off your mortgage as a priority, unless there are higher interest rates being paid on other debt such as credit cards, etc. which should be paid down first.
Although savings accounts do offer protection to your capital, since the banks have not passed on the interest rate rise to their savings accounts, the interest paid is likely to fall well short of inflation. Therefore, the fact that savers are losing money in real terms is a harsh reality of where we are right now, with some uncertainty of what this may look like in the coming months and years.
For those looking to secure a higher level of income and/or growth over and above the rise in the cost of living, then investing may be the only option since there are no savings products paying anything close to the current rate of inflation. You may want to explore the investment plans we have on offer, as they may provide the opportunity for returns to counter the adverse effect of inflation. However, if you are looking to invest in a plan, it is important to do you research, and make sure you fully understand the risks involved before putting your capital at risk.
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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. ISA transfer charges may apply, please check with your provider.
The investment plans referred to in this article are structured investment plans that put your capital at risk and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.
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.
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.
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.
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.
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.
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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
The 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.
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.
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.
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.