Posts Tagged ‘five year bond’

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: 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.

Savings Focus – Investec savings accounts offering up to 3.85% AER fixed

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Investec Bank continues to offer innovative savings plans which combine a competitive interest rate with efficient service and attractive features.  So if you have a minimum of £25,000 to deposit, and you want to take advantage of some of the highest savings rates on the market, their latest range of accounts are certainly worth reviewing. With a range including instant access and fixed terms between 1 and 5 years, there should be something for every saver. All the Investec savings accounts featured below are covered by the Financial Services Compensation Scheme (FSCS).

Investec E-asy Access – 1.30% AER

The E-asy Access Account pays 1.30% AER variable with interest paid monthly and there is no bonus included in the rate so what you see is what you continue to get. This is a no notice easy access account and so there is no restriction on the number of withdrawals or who you can pay. The account is available as a single or joint account and access to account information is via online and telephone banking. Interest is paid monthly and will therefore compound unless paid away into another account. You can apply online, request further information to be sent to you via email, or have someone from the bank call you back.

Click here to find out more about the Investec E-asy Access Account »
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Social Impact Bond Offers Up To 15.1% Per Year Using Tax Breaks

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Socially responsible investment and competitive returns are not always phrases that are found in the same sentence, but a new investment opportunity launched this week may be an exception. Launched in partnership with ethical bank Triodos, under the leadership of CEO Richard Nicol, the Midlands Together Community Investment Company (CIC) Bond aims to address some of the obstacles faced by ex-offenders when seeking employment after the end of their sentence. The money raised will be used to provide training and employment opportunities in the Midlands to some of the 58.2% of adults serving short-term prison sentences who go on to reoffend upon release (source tridos.co.uk, 30/07/13).

A worthwhile investment

Many ex-offenders lack training, experience and skills to enter the workplace, as well as facing social and personal challenges to gaining employment. With the odds stacked against them, many ex-offenders find it all too easy to drift back into their previous lifestyle on leaving prison. Midlands Together aims to provide paid work for ex-offenders and equip them with the skills they need to secure permanent jobs, helping them break out of the cycle of reoffending.

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