Posts Tagged ‘fixed rate alternatives’

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.

 

Compare fixed rate bonds »

Compare fixed rate Cash ISAs »

Find out more about the Investec 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.

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.

Savings Focus: Investec Retirement Deposit Plan offering 3.75% each year

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Last updated: 08/11/2016

There’s no denying that the outlook for traditional Cash ISAs at the moment is bleak. Not only are savings rates at rock bottom, but banks don’t really want the additional cost of having to run the Cash ISA tax wrapper that goes with it – most high street banks simply do not want your Cash ISA money – and therefore for those that do, they only need to offer a low rate of interest to get it. For those looking for alternatives, this new launch Cash ISA from Investec Bank plc offers an interesting way to receive tax efficient withdrawals each year, combined with the potential to receive back an amount equal to your initial deposit at the end of the fixed term. Here we take a closer look to see how it stacks up.

Traditional Cash ISAs offering low returns

The banking and economic environment continue to create challenges for savers, brought about in the main by the impact of record low interest rates on our savings and our future. The current market for traditional Cash ISAs still offers some of the lowest rates ever seen. In fact, you are hard pushed to get much over 1.50% in return for tying up your money for five years, which is why many looking for a fixed rate are considering shorter term options.

Currently our most popular deals come from Aldermore Bank, paying 0.95% AER, 1.15% AER and 1.20% AER on their 1, 2 and 3 year fixed rates respectively. You can save from £1,000 and can transfer existing ISAs. Our leading instant access account is the AA Cash ISA Easy Access, paying 0.75% AER variable.

Cash ISA alternative – potential for higher returns

By linking the amount of capital that is returned to you at the end of the plan to the FTSE 100 Index, this structured deposit plan offers the potential for higher returns than those that are available from more traditional products such as fixed rate Cash ISAs. So the upside is the potential for higher returns, whilst the downside is that since your return is linked to the performance of the UK stock market, unlike a fixed rate it is not guaranteed. This is the trade off for the opportunity to receive higher overall returns.

Fixed payments of 3.75% each year

The Investec FTSE 100 Retirement Deposit Plan has a fixed term of 6 years and pays a fixed payment of 3.75% each year, paid to you regardless of what happens to the FTSE 100 Index. Over the six year term this equates to 22.5%.

Capital returned at the end of the plan

The aim of the plan is to withdraw fixed annual payments from your initial deposit over 6 years, and repay the remainder of your initial deposit plus an additional return at maturity. The amount of capital returned at the end of the plan therefore, is either the remaining 77.5% of your initial deposit, or the remaining 77.5% plus an additional return of 22.5%.

This additional return is paid provided the FTSE 100 is higher than 90% of its level at the start of the plan, so the Index could have fallen up to 10% and you would still receive this additional return. If the FTSE has fallen by 10% or more, the amount returned to you will only equal the remaining amount of your initial deposit (i.e. no growth will be achieved).

‘Defensive’ feature

Since the additional return on offer is dependent on the performance of the FTSE 100 Index, the defensive feature of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 10% and the fixed return of 22.5% is still paid.

The use of averaging

When calculating the final level of the FTSE 100 Index 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.

Returns compared

The 3.75% annual payment is well over double any fixed rate on offer from a traditional Cash ISA. However, it is important to remember that in the case of a traditional fixed rate Cash ISA, your initial deposit is always returned in full at the end of the fixed term. Although the annual payments from the Investec plan are fixed and paid each year, it is only if the additional return is paid at the end of the plan term would you be better off overall.

Capital protection

Since the plan is a structured deposit you will receive the remainder of your initial deposit back in full at the end of the six year term regardless of what happens to the FTSE 100 Index, and as long as the deposit taker for the plan, Investec Bank Plc, is able to repay your money. The bank’s ability to stay solvent and repay your capital is known as counterparty risk and is the same risk you take with any capital deposited with an institution with a UK banking licence.

In the event that Investec is unable to meet its liabilities, this deposit plan is eligible for Financial Services Compensation Scheme (FSCS) protection. Therefore, eligible depositors could be entitled to claim up to £75,000 per person.

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.

Cash ISA only

Please note that this plan is only available as a Cash ISA. The plan also accepts ISA transfers, from both Cash ISAs and Stocks & Shares ISAs and has a minimum deposit of £3,000 and the maximum deposit for a new current year ISA (2016/17) is the ISA limit of £15,240.

Fair Investment view

Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “There’s no getting around the fact that the rates on offer from traditional Cash ISA savings products remain at record lows, and this looks set to continue. This is a real challenge for savers. By combining capital protection, fixed annual payments and the potential for an additional 22.5% return at maturity, this new launch from Investec offers an interesting alternative. The best long term fixed rate Cash ISAs are currently only offering a little over 1.50%, so if this plan pays the growth return at maturity, your overall return will be well over double these top deals.”

He continued: “Both are treated the same for FSCS purposes (up to the usual deposit scheme limits) but unlike the fixed rate Cash ISA, the maturity payment on the Investec plan is dependent on the FTSE and is not therefore guaranteed. So if you are prepared to sacrifice a guaranteed rate of interest, then the potential higher returns on offer could be appealing in the current economic climate.”

This plan is open now for new ISA deposits up to the £15,240 allowance for the current tax year (2016/17), as well as Cash ISA and Stocks & Shares ISA transfers. The minimum investment is £3,000.

 

Click here for more information about the Investec FTSE 100 Retirement Deposit 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. Always remember to check whether any charges apply before transferring or switching an ISA.

This is a structured deposit plan that is capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial capital and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial deposit 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.

Fixed returns – our round up of the latest fixed rate options

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Last updated: 30/08/2016

For those who want to know exactly how much they will receive, when and for how long, the traditional deposit-based fixed rate bond has long been one of the safest and most popular choices for many. But with interest rates on savings remaining at record lows, and with the possibility of this getting even or fixed worse as we get to grips with the post-Brexit environment, many more are starting to consider the wider range of products offering a fixed return. So whether it is the more traditional fixed rate bond rate Cash ISA, or you are looking to put your capital at risk in return for a higher fixed income, we take a look at a number of options as well as give you a round-up of the latest offerings.

Short term: up to 2 years

Fixed rate bonds

For those looking at the shortest fixed terms, Habib Bank Zurich offer a 6 Month Fixed Rate Deposit paying 0.80% AER, whilst they also offer a higher rate of 1.10% AER if you can tie your money up for a year, with their 12 Month Fixed Rate Deposit. Both products have a relatively low minimum of £1,000 and your deposit is 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.

Bank of Cyprus UK offer a top rate of 1.40% AER if you fix for 2 years, although they have a slightly higher minimum of £10,000 whereas Habib Bank will offer 1.35% AER with their 24 Month Fixed Rate Deposit but with a lower minimum of £1,000. Both pay interest at maturity and eligible deposits are covered by the UK FSCS.

Fixed rate Cash ISA

Bank of Cyprus UK offer a 2 Year Fixed Rate Cash ISA paying 1.20% AER, and only marginally higher at 1.30% AER if your fix for 3 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. ISA transfers are permitted and eligible deposits are covered by the UK FSCS.

Medium term: 3 to 4 years

Fixed rate bonds

In the three to four year space, our top deal comes again from Bank of Cyprus UK with their 3 Year Fixed Rate paying 1.50% AER. The minimum deposit is £10,000 and interest is paid on maturity. For those looking for a lower minimum or more frequent payment of interest, AXIS Bank UK’s 3 Year Fixed Term Deposit also pays 1.50% AER but with a £1,000 minimum (£200,000 maximum) and offers monthly, quarterly, annually or at maturity interest options. No withdrawals are permitted from either account.

Fixed rate Cash ISA

Bank of Cyprus remain very competitive in the fixed rate Cash ISA market with their 3 Year Fixed Rate Cash ISA currently paying 1.30% AER and with a respectable minimum deposit of just £500. This account also allows you to transfer in existing ISAs from other providers.

Longer term: 5 years +

Fixed rate bonds

Although you 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 2.20% AER. The minimum deposit is £1,000 and interest can be paid monthly or annually.

Savings rates at record lows…

Unfortunately the UK’s decision to leave the EU has had an impact on what were already record low interest rates on offer. Combined with the talk of the Bank of England potentially cutting the Bank Rate for the first time since 2009, and the outlook for many who rely on more traditional fixed term deposits is bleak to say the least.

To put this into context, 12 months ago we wrote about a 1 year fixed rate paying 1.90% AER, a 2 year paying 2.38% AER and a 3 year paying 2.50% AER . We are now looking at 1.25%, 1.60% and 1.65% AERs respectively. These are significant reductions of up to 34% on what were already historically low returns, with the biggest falls being felt at the longer term end of the market. This is why more and more are looking at a wider range of options, which inevitably leads one to consider investments.

Fixed income investments

The income from collective investments (such as funds) invariably comes from investing in a number of equities, bonds and commercial properties, which provide income in the form of dividends, interest and rental yields. Combined with the fluctuation in value of the underlying asset, be this a share, bond or property, then by its very nature the value is neither fixed nor guaranteed, and so such investments normally only offer a variable income.

Fixed income, fixed term

Investors have therefore always struggled to find an investment that actually pays a fixed income, which perhaps partly helps to explain why the Enhanced Income Plan from Investec has been our most popular income investment. 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.

This investment includes conditional capital protection which means that your initial capital 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

The most important difference 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. 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, as highlighted above the return of your capital is also dependent on the performance of the FTSE 100 Index, therefore your capital is not protected and is at risk.

Peer to Peer

One particular area where we have seen a significant rise in the number of the offerings is Peer to Peer lending, some of which offer fixed rates of interest. In simple terms, peer to peer lenders match people who want to earn interest on their money with people who want to borrow money. This means that both lenders and borrowers can benefit from interest rates that are better than those found on the high street, whether from conventional fixed rate accounts or from bank loans.

Fixed interest

One of the earliest and perhaps best known Peer to Peer lenders offering fixed interest is Wellesley & Co. Here your investment is combined with funds from other investors and then lent out to individuals and businesses investing in property – so every loan is secured against tangible assets such as residential or commercial property. They then use the interest paid by them to pay competitive rates to investors. Wellesley have lent out over £336m to date.

The current rates (based on receiving monthly interest) are 2.95%, 3.30% and 3.70% over 1, 2 and 3 years respectively. You also have the option to receive interest at maturity, offering up to 3.75% annual interest. Compared to deposit-based fixed rate bonds these headline rates are attractive however these are capital at risk investments, and so you could lose some or all of your initial investment and interest payments are no guaranteed if the borrower fails to repay the loan. Peer to Peer lending is also not covered by the Financial Services Compensation Scheme.

Risk v reward

The principle of risk versus reward means that the search for higher fixed returns 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 three and five year fixed rates are currently offering 1.85% and 2.20% respectively. By accepting risk to your capital, Wellesley would offer fixed interest of 3.70% over three years whilst the Investec plan offers 5.04% over six years, thereby doubling your fixed return over three year and increasing it by 2.84% a year over the longer term. Once you have understood how each plan works, the decision then is whether you are comfortable with putting your capital at risk in return for the higher fixed returns on offer.

 

Compare fixed rate bonds »

Compare fixed rate Cash ISAs »

Compare Peer to Peer investments »

Find out more about the Investec 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.

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 or any shares listed within the Index is not a guide to their future performance.

Peer to peer savings accounts are not the same as normal savings accounts so you need to consider the features before you invest. Investment through Wellesley & Co involves lending to individuals or companies and therefore your capital is at risk and interest payments are not guaranteed if the borrower fails to repay the loan. In that event, Wellesley Finance would attempt to recover the funds outstanding. However, such security arrangements do not guarantee full return of capital and income. Peer-to-Peer lending is not covered by the Financial Services Compensation Scheme.

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 Head to Head: comparing fixed rate bonds and structured deposits

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Despite the prospect of interest rates rising in the next few years, many savers understand that even when this does eventually occur, there is no guarantee that this will result in higher savings rates being offered by the banks. Indeed, most of us would agree that the 5% plus returns of yester-year are well and truly behind us. This has led many to consider moving some of their savings into areas with the potential for higher returns. Investing is perhaps the most obvious choice however there is also a popular middle ground, which combines the potential upside of stock market linked returns but without risking your capital and maintaining the FSCS depositor protection so many savers look for – the structured deposit.

Since many of these savers are using money that historically would have been put into a fixed rate bond, so we take a deeper look at the rise in popularity of the structured deposit by comparing it with the more traditional fixed rate.

Fixed rates fail to hit the mark

We are all aware that past performance is no guide to future performance when it comes to reviewing a particular investment or how a stock market index has performed previously, but what are the main risks associated today with cash and savings rates?

In years past it would have been commonplace for savings accounts to offer the potential to beat what at the time would have been much higher levels of inflation, especially if you were prepared to tie yourself in for the medium to longer term. But today, the best fixed rates are offering little above 3% and this has been the case for some time. This is therefore a significant shift in the savings landscape.

Savings or investment?

This sets the scene for the rise in popularity of an alternative to fixed rates bonds – the structured deposit. This product similarly provides full capital protection and can also be used for ISA money, both New ISAs (NISAs) and ISA transfers, therefore placing it in the savings space as a potentially viable alternative to more traditional offerings.

There are a variety of structured deposits being offered in the market today. Although they can be considered as an alternative to fixed rate bonds, they also have characteristics that are similar to investments. The purpose of this comparison is to help you understand what structured deposits are by comparing them with the more traditional fixed rate products and what you should look out for before putting your hard earned money in such products.

What is a structured deposit?

A structured deposit is essentially a combination of a deposit and an investment product, where the return is dependent on the performance of an underlying investment. The underlying investment is normally either an Index, such as the FTSE 100 Index, or a smaller number of shares from within the Index.

UK structured deposits naturally lean towards the FTSE 100 Index as this is the most commonly quoted benchmark of investment performance and is the most familiar to investors in this country. If the deposit uses a smaller number of shares rather than the Index itself then these are normally shares listed within the FSTE 100 Index and often it is the larger shares available that are used.

How do structured deposits compare with fixed rate bonds?

Structured deposits have a few important characteristics that distinguish them from the more traditional savings accounts. With a fixed rate bond the returns and maturity periods are fixed while structured deposits on the other hand have variable returns, and in some cases, variable maturities as well.

Variable returns

Structured deposits generally provide the possibility of higher returns compared to fixed rate bonds. This has particularly been the case in recent years with continuing record low interest rates and historically low savings rates. However, you should balance this possibility of higher returns against the risk of variable returns. In some scenarios, you may get lower or no returns at all.

Fixed or variable maturities

Most structured deposits have fixed terms which are normally between three and six years in duration whilst some incorporate the ability for the deposit to be redeemed before the maturity date. A popular example of this is an autocall, more commonly known as a ‘kick out’ plan. Here, the plan will mature early or ‘kick out’ provided the underlying investment performs in a particular way, which will be known prior to investing since it will specified in the terms and conditions of the plan. The Investec Kick Out Deposit Plan for example will mature early if the value of the FTSE 100 Index at the end of years 3, 4 or 5 is higher (subject to averaging) than its value at the start of plan. If it is not higher on any of these dates, the plan will continue.

Early maturity

Where a structured deposit is designed in this way and early maturity does occur, you can expect to receive, as a minimum, the full value of your initial deposit. Depending on the circumstances, this early redemption feature may benefit you – for example, if you wish to use your money in other ways, you can get back your initial capital and any stated additional returns as soon as redemption occurs.

You may, however, be exposed to reinvestment risk, as you would with any fixed term savings product. This is the risk of having to re-invest your money in a low interest rate environment when interest rates fall. To counter this, structured deposits are usually re-issued every 4 to 6 weeks so there is normally the facility to reinvest either in the provider’s current version of your original plan, or if the exact plan is no longer available, a similar plan with your original provider or another in the market. Therefore, depending on market conditions and your specific income or growth needs, a structured deposit may or may not be a good investment to put your money in.

What happens if I need to withdraw my deposit before the maturity date?

Structured deposits, like fixed rate bonds, are meant to be held for the full term. Your initial deposit will be repaid in full only at maturity (or early maturity where relevant). If you withdraw your deposit before the maturity date, you may lose part of your return and/or your initial capital. The amount payable to you depends on the market value of the underlying investment that your structured deposit is linked to, which cannot be pre-determined. There is also therefore the possibility that the value could be higher than your original deposit. You should also bear in mind that structured deposits may be subject to periodic valuations which may not be on a daily basis, for example weekly. This means that you may not be able to withdraw your deposit immediately.

What should I consider before investing in a structured deposit?

Structured deposits come in different forms. You should consider whether a structured deposit fits with your financial goals, attitude to risk and your personal situation. When choosing a structured deposit, these are some of the factors to consider:

Liquidity

When might you need this money and do you have any additional funds available? Consider your liquidity needs as your money will be tied up for a period of time and early withdrawal may result in loss of part of your return and/or your initial deposit. Fixed rate bonds are also likely to have penalties for cashing in before the end of the fixed term which is normally linked to a period of interest (for example, six months). This amount could be higher or lower than the loss for early withdrawal from a structured deposit. As with any fixed term plan, it is therefore prudent to make sure that you have sufficient savings set aside before investing in structured deposits.

Risks

Determine whether you have the risk appetite for these products. Structured deposits are riskier than normal fixed deposits as there is a risk that the underlying investment does not perform in the manner required in which case you may not receive any returns at all. In this scenario you would have been better off with a fixed rate bond. You should understand the risks involved and what will happen in a worst-case scenario and if you are unsure, seek financial advice from a professional.

One of the major risks to consider for fixed rate bonds is that your money loses value in real terms should it fail to keep up with inflation. Although inflation is historically low at present, so too are he returns available on fixed rates. Therefore, although you have the peace of mind of a guaranteed return, this is not guaranteed to keep up with increases in the cost of living and so your initial deposit plus any interest could in the future be worth less in real terms.

Return

Since the returns from structured deposits are dependent on the performance of an underlying investment such as stock market indices or shares, you should understand how the performance of the investment affects the return on your deposit. Remember that past performance is not a guide to future performance.

Terms and Conditions

Read the terms and conditions and other documentation of the structured deposit carefully before making any commitment. If you do not understand how the product works, seek clarification. Do not buy anything you do not understand.

Structured deposits compared to fixed rate bonds

This table compares the main features of structured deposits and fixed rate bonds:

Features Structured Deposits Fixed rate bonds
Minimum deposit Structured deposits sometimes require a higher minimum investment amount (usually £3,000) but there are some providers who offer lower minimums of £500. The minimum amount for a fixed deposit is normally around £1,000 but note the recent trend for providers to offer tiered interest rates where the higher headline rates are only on offer for larger lump sums.
Fixed terms Structured deposits have maturity periods that vary from 3 years to 6 years. Fixed rate bonds normally have maturities ranging from 9 months to 5 years although there are some who offer shorter terms.
Early maturity Some structured deposits incorporate the potential to mature early each year, currently from as early as year 3 onwards. In this situation, you will normally receive a return of your initial deposit along with any stated returns. Fixed rate bonds do not normally have the ability to mature early.
Initial deposit Your initial deposit will be repaid in full: (i) At maturity; or (ii) If the bank redeems it before maturity. This will apply only if your structured deposit includes an option that enables the bank to redeem or “call” the deposit before the maturity date for reasons specified in the terms and conditions – this is normally dependent on the performance of the underlying investment. Your initial deposit will be repaid in full at maturity.
Early withdrawal by the depositor If you withdraw your deposit before the maturity date, you may lose part of your return and/or initial deposit. The amount that you will be paid depends on the market value of the underlying financial instrument that your structured deposit is tied to, which cannot be pre-determined. You should also bear in mind that structured deposits may be subject to periodic valuation, which may not be on a daily basis. This means that you may not be able to withdraw your deposit immediately. Check the terms and conditions for early withdrawal of the deposit with your bank. If you withdraw your fixed deposit before maturity, the bank may levy certain charges. In most cases, your bank would have taken a corresponding commitment on your deposit with a counterparty.When you withdraw your deposit early, your bank may have to levy charges to cover the cost of its own commitment. Check the terms and conditions for early withdrawal of the deposit with your bank.
Risks involved Structured deposits are generally less risky than investing directly in the underlying investment since the bank is obliged to repay the principal in full at maturity or when it redeems the deposit before the maturity date.However, they are riskier than traditional fixed rate deposits because their returns are dependent on the performance of the underlying investment. In some scenarios, you may get no returns at all and only get back your initial deposit. Where a structured deposit is callable, you may be exposed to reinvestment risk. This is the risk of having to invest your money in a low interest rate environment when interest rates fall. Structured deposits have maturity periods that vary from 3 to 6 years and are designed to be held for the full term which means that you may not be able to use your money for other purposes before maturity, for example, investing your funds in a fixed rate bond or an alternative savings plan offering higher interest rates when interest rates rise. Structured deposits are exposed to the credit risk of the deposit-taking institution (for example, a bank). This is the risk that the deposit-taker will be unable to fulfill its obligation to pay you even your initial deposit should it fail and become insolvent. However, in this situation it is likely that you would be eligible to claim under the Financial Services Compensation Scheme, depending on your individual circumstances. Fixed rate bonds are considered low-risk as the interest payable is known at the outset and your initial deposit is fully capital protected. Fixed rate bonds are similarly exposed to the credit risk of the deposit-taking institution being unable to fulfill its obligation to pay you the deposited sum. However, in this situation it is likely that you would eligible to claim under the Financial Service Compensation Scheme.The impact inflation can have on your overall return is an important risk to be aware of since if the rate of return you commit to is lower or become lower than inflation during the fixed term, the purchasing power of your capital will be eroded and you may be unable to surrender without incurring penalties.
Financial Services Compensation Scheme Structured deposits are covered by the Financial Services Compensation Scheme which covers deposit claims up to a maximum of £85,000 per person, per institution, subject to your individual circumstances. Fixed rate bonds are also covered by the Financial Services Compensation Scheme up to £85,000 per person, per institution.
Returns Structured deposits generally offer the possibility of higher returns compared to fixed rate bonds of similar duration. This is in line with the higher risks you have to bear since the return on a structured deposit is dependent on the performance of the underlying investment (such as stock market indices or shares) to which it is linked – if this does not perform as required, you may not get a return. Returns on fixed rate bonds are typically lower as they are less risky than structured deposits. This is because the deposit is fully capital protected and the rate of interest paid is fixed at outset and guaranteed to be paid provided you do not withdraw your money early and the provider does not become insolvent.

The final analysis

Fixed rate bonds pay a fixed rate of interest at predetermined times throughout the fixed term, so you know exactly what you will receive and when you will receive it, giving you certainty of interest and the peace of mind which this entails. Unfortunately times have changed. One of the main reasons for the increase in popularity of structured deposits has been the over-reliance of fixed rate bonds by savers who are now seeing the real value of their savings eroded at a time when they need it most.

Structured products combine capital protection with the potential to receive higher rates than available from fixed rate bonds. Since there is the potential to achieve only a return of initial capital, structured deposits are not however designed to meet the needs of every saver nor, perhaps, to receive your entire savings. Ultimately, which option or blend of options will depend entirely on your individual circumstances.

Weighing up all of the options

These are difficult times to say the least and in recent years it is the saver who has perhaps suffered more than anyone else. Record low savings rates continue, low wage increases have affected both private sector and public sector employees alike. Understanding the impact of low rates, especially over time, and giving full consideration to all of the options available, particularly using your ISA allowance, are all good reasons to compare traditional savings accounts with alternatives such as structured deposits.

There is a wide variety of structured deposits being offered in the market and as market conditions allow, these are constantly being updated with new versions of previous issues as well as completely new plans. We at Fair Investment Company aim to provide you with a continuous selection of the best the market has to offer so keep coming back to visit us.

 

Click here to compare alternatives to fixed rate bonds »

 

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.

Some of the plans referred to in this article are structured deposit plans that are capital protected. 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 this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. 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 and any of it shares is not a guide to its 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.

Summer Sizzlers II: Which Savings are Hot this Summer?

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Updated: 24/08/2015

For those who are looking for fixed rates or alternative savings ideas this summer, there are signs that the market is beginning to hot up by offering more competitive rates and bringing some much needed innovation. In the second of our two part summer feature, we let you know which savings accounts are performing well this summer by giving you our selection of summer sizzlers from the best the market has to offer.

Regardless of how long you can tie up your money, from instant access to long term savings alternatives, there should be something here for everyone from instant access and guaranteed fixed rates, to Cash ISAs and savings alternatives which offer the potential to beat what are still historically low savings rates.

Instant access – up to 1.40% AER variable

If you are looking for an instant access ISA, Nationwide’s Instant ISA Saver is currently paying 1.40% AER variable interest and can be opened by UK residents aged 16 and over from just £1. This simple, flexible account could be an option to consider if you are new to ISAs or are looking for a low-deposit ISA deal that is suitable for a young person over 16 who wants to start saving. For those who are seeking a non-ISA instant access savings deal and would prefer to receive monthly interest, the Online Instant Access Savings Account from State Bank of India offers an interest rate of 1.25% AER variable which is paid on a monthly basis. A minimum deposit of £500 is required to open this savings account.

Click here to find out more about instant access ISAs »

Click here to find out more about instant access savings accounts »

Instant access cash management – up to 1.63% AER variable

Savings Maximiser is a cash management service that compares the best buys from across the market and by regularly reviewing your accounts and making switches if a better rate is available, aims to secure a consistently competitive rate of interest. Aimed at those who want to retain instant access to their money at all times and have at least £25,000 to keep on deposit, the service offers full banking facilities and is simple, secure and saves you time. With the ever increasing number of savings rates on offer, the pace of change to market leading rates and potential interest rate rises on the horizon, this could be a perfect time to consider Savings Maximiser. Current rates available are up to 1.63% AER variable and there is a fixed monthly fee for this service.

Fair Investment view: “The upside to this type of account is that you have instant access to all of your money, whenever you want it, although there are still a few deals where the headline rate includes a bonus after 12 months so you may still need to plan ahead. However, we are also well into our seventh year of record low interest rates and the returns on offer from instant access are still low. With some signs that this may start to pick up, a cash management service which reviews the best rates for you could be a timely opportunity.”

Click here to find out more about Savings Maximiser »

Short term savings – 2.38% AER fixed for 2 years

For those who are able to tie up their money for two years and are also looking for a fixed rate of interest, the 2.38% AER on offer from Access Bank UK’s 2 Year Fixed Rate Bond is market leading. The minimum deposit is £5,000 and interest is paid at maturity. The account can be set up as a single or joint account and access to account information is online or via telephone. As with most fixed term accounts, no early withdrawals are permitted. You can apply online quickly and securely.

Fair Investment view: “A fixed rate bond such as this offers security for your capital, and you know exactly how much you will paid and when, but with savings rates still at some of their lowest levels of all time, even at 2.38% you could find that this type of savings account is offering significantly lower returns than the rates on offer a few years ago.” 

Click here to find out more about the Access Bank UK 2 Year Fixed Rate Bond » 
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Savings Focus: Investec 6 Year Defensive Deposit Plan

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Updated: 02/09/2015

The economic environment continues to create challenges for savers, brought about in the main by the impact of record low interest rates on our savings and our future. Whilst the current market for traditional fixed rates still offers some of the lowest rates ever seen, it is perhaps easy to understand why the potential for higher returns available from the range of structured deposit plans is becoming a more compelling option for savers to consider. With this in mind, we take a detailed look at one of our most popular, the FTSE 100 6 Year Defensive Deposit Plan from Investec Bank, to find out why this plan could be an alternative for your deposit or Cash ISA savings.

Traditional savings products underperforming

The current economic environment is as challenging as it’s ever been and those that are feeling it most are cash savers looking for a competitive net return on their deposit, once tax and inflation are taken into account. Unfortunately, many traditional savings products are failing to deliver with both instant access and fixed rate bonds continuing to offer record low rates.

Potential for higher returns

By linking your returns to the FTSE 100 Index, this structured deposit plan offers the potential for higher returns than those that are available from more traditional products such as fixed rate bonds. The upside is the potential for higher returns whilst the downside is that since your return is linked to the performance of the UK stock market, unlike a fixed rate it is not guaranteed. This is the trade off for the opportunity to receive higher returns.

Potential return of 33% after 6 years

The Investec FTSE 100 6 Year Defensive Deposit Plan protects your initial deposit whilst offering a fixed return of 33%, provided the level of the FTSE 100 Index at the end of the plan is higher than 90% of its value at the start of the plan, subject to averaging. So the FTSE can fall up to 10% and you still receive the full growth return. The 33% fixed return is equivalent to around 4.85% AER. If at the end of the six year term the Index is equal to or lower than 90% of its value at the start of the plan, you will not receive a return but your original capital will be repaid.

‘Defensive’ feature

Since the fixed return on offer is dependent on the performance of the FTSE 100 Index, the defensive element of the plan is an important one to understand. Rather than the Index having to finish higher than its value at the start of the plan, the Index can fall up to 10% and the fixed return of 33% is still paid. Whilst the FTSE remains at what are historically relatively high levels, this could be an appealing feature.
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Investment Focus – Investec Enhanced Kick Out Plan

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Fixed term investment plans that have the ability to mature early or ‘kick out’ each year seem to be popular whatever the market conditions but particularly so when the FTSE is at historically high levels. The Enhanced Kick Out Plan from Investec currently offers the highest rate of any kick out investment based on the FTSE 100 Index which helps to explain why this plan is proving so popular both with our existing customers as well as new investors. We take a closer look at the plan and review the risk versus reward on offer to see how this might make for an attractive opportunity in the current investment climate.

Background

Investors looking to gain a broad exposure to the UK stock market often look to investments linked to the performance of the FTSE 100 Index. But despite its recent dips, the Index continues at what are historically high levels, and so many investors find it difficult to decide whether now is the right time to invest or not.

Investors considering their options are often split down the middle – on the one side are those who feel confident that the Index can break through the 7,000 point barrier again and keep going, and then there are those on the other side who remain uncertain that the market will continue to rise.

Proving popular

The FTSE 100 Enhanced Kick Out Plan from Investec continues to be popular with both existing customers and new investors. Many of our existing customers have investments that have matured recently or are likely to mature early in the coming months, thereby providing them with the opportunity to consider new investment opportunities and many have considered this plan. For new investors, the headline rate of 10% is also proving a compelling opportunity in the current investment climate and has been particularly popular with those using their £15,240 New ISA allowance – so how does the investment work?

In a nutshell

The plan will return 10% per year (not compounded) provided the value of the Index at the end of each year is higher than its value at the start of the plan – so although the FTSE does have to rise, this only needs to be by a single point. Your initial capital is at risk if the Index falls by more than 50% during the term and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall.

Early maturity

The term ‘kick out’ refers to the ability of the investment plan to mature early depending on the movement of the FTSE 100 Index. Plans that have the ability to mature early and provide a competitive return on your capital have proved popular with investors in all types of markets.

The fact that investors can achieve investment level returns even if the market stays relatively flat could also be why this investment has proved particularly popular, whilst the FTSE remains at historically high levels.
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The Investor’s Guide to Kick Out Plans

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It seems that regardless of the prevailing economic conditions, the kick out investment continues to be a popular choice with investors. Although not yet a mainstream investment when compared with investment funds, the defined return and defined risk on offer from this fixed term investment seems to make them particularly sought after when the market is at historically high levels and investors are finding it difficult to commit. We take a closer look at the kick out plan to try and understand why their popularity has continued to rise in recent years. We also consider how this might make for an attractive opportunity in the current investment climate as well as review some of the recent market trends.

Kick out investments hitting the mark

The defined return for a defined level of risk has made the structured investment an attractive addition to the range of investment options available, whilst in recent years the kick out plan has been the stand out of this type of investment in terms of popularity. Capable of adapting its structure in line with market conditions and investor demands, the inherent flexibility in how these plans can be put together is perhaps one of the main reasons for their continuing popularity, seemingly hitting the mark with a wide range of investors.

What is a kick out investment?

Kick out investments, also known as autocall investments, are fixed term investments that have the potential to mature early or ‘kick out’ provided that a predefined event takes place. This will usually be a set of predefined market conditions which need to be met in order for the investment to mature early, such as a particular barrier on a set observation date. Kick out investments are therefore linked to the performance of an underlying investment, often a stock market index such as the FTSE 100 or sometimes a small number of FTSE 100 listed shares. If the required conditions are met, the plan automatically matures early or ‘kicks out’, returning your original capital along with the defined returns offered at the outset. Should this event fail to occur, the plan keeps going to subsequent trigger anniversaries (often annually) or until the end of the fixed term. The investor therefore has the benefit of knowing at outset the conditions that need to be met in order to provide the stated returns, thus providing a defined return for a defined amount of risk.

When considering which kick out investment might meet your needs, it is important to review and compare the differences between the various plans available. Here are some of the main features to consider.

Headline return

The headline return on offer is understandably the investor’s initial focus when reviewing an investment. These are defined returns which are paid depending on the performance of the underlying investment. The headline return is normally an annual return expressed as a percentage, which is then multiplied by the number of years invested should the investment mature early or at the end of the term. It is important to note that these returns are not compounded, for example if the headline rate is 9% and the investment kicks out at the end of year 3, the growth return paid will be 27% (plus a return of your original investment).

The level of return on offer should be compared to risk free returns, perhaps those readily available from holding cash for a similar period of time. This will allow the investor to consider whether they are prepared to put their capital at risk in order to achieve the potential upside.
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Ideas for Savers Looking to Enhance their Returns

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The pressure on savers to maximise the returns from their capital is arguably greater than ever before, but despite inflation being at rock bottom, the current market for instant access and fixed rate bonds rarely offers us anything to shout about. We therefore take a look at a selection of opportunities that are being considered by savers looking for the potential to enhance their returns, all of which are available both in and outside of an ISA.

Savings rates, dire straits

The mainstay of many a saver’s portfolio has historically been the fixed rate bond. However, rates here still remain at historically low levels as banks have been able to secure cheap funding by alternative means which has resulted in an increasing number of savers shoring up reserves in instant access accounts. But with leading deals only offering around 1.25% AER variable, there is little prospect of growth on your capital over and above the cost of living. And with longer term fixed rates only offering around 3.0% AER, long gone are the days where committing your money for longer was all you needed to secure a competitive rate.

Alternatives bridging the gap?

The implications of the current savings rates on offer need to be taken very seriously since it calls into question the traditional thinking behind many saver’s decisions. Also gone are the days when it was enough to keep a relatively small amount in instant access and then simply roll your fixed rate bond into the prevailing rate available at maturity.

Although fixed rate bonds should continue to play an important part in the savings jigsaw, their status as being the only option for money we do not need immediately should be carefully reviewed, especially in the context of the historically low rates on offer. So what alternatives are being considered?
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