Posts Tagged ‘fixed rate bonds’

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

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

Fixed rate bond

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

Fixed savings rate reality check

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

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

Fixed rate investment

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

NS&I versus Investec

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

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

Fixed term

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

Fixed rate

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

Payment frequency

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

Interest payments

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

Minimum/maximum contributions

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

Early closure

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

ISA option

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

Offer period

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

Treatment of capital

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

Credit risk & compensation scheme

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

Compared to inflation

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

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

Fair Investment conclusion

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

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

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

 

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

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

 

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. Fair Investment Company does not offer advice and any investment transacted through us is on a non-advised basis. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

The Investec Enhanced Income Plan is a structured investment plan which is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to their future performance.

Tax treatment depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.

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

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

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Last updated: 14/02/2017

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

Lending history

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

UK based fixed rate savings accounts

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

Masthaven Bank Fixed Term Bonds – up to 2.06% AER

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

Summary of Fixed Term Bond rates

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

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

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

Masthaven Flexible Term Saver – create your savings account

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

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

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

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

How much can you save?

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

Interest

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

Account set up

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

Financial Services Compensation Scheme

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

The UK’s only owner-managed bank

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

The Board of Directors is as follows:

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

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

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

 

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

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

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

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Last updated: 17/01/2017

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

Fixed rate bonds a popular choice

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

Short term: up to 2 years

Fixed rate bonds

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

Fixed rate Cash ISAs

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

Medium term: 3 to 4 years

Fixed rate bonds

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

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

Fixed rate Cash ISAs

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

Longer term: 5 years+

Fixed rate bonds

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

Fixed rate bond holders facing significant falls

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

Investing for fixed income

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

Fixed income, fixed term

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

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

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

Cash versus investment – understand the risks first

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

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

Risk v reward

The principle of risk versus reward means that the search for higher fixed returns usually leads to the need to consider putting your capital at risk. A good benchmark for assessing your fixed rate investment is to compare what you could get from a fixed rate deposit over a similar timeframe, and then consider whether you are prepared to accept the level of risk to your capital in return for the higher fixed rate.

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

 

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.

Summer sizzlers: our selection of the hottest deals on offer this summer

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Last updated: 12/09/2016

As the Olympic Games continue to keep us gripped with excitement, it’s not just the GB Team that’s sizzling this summer. The news that the Bank of England base rate has fallen to a new record low has meant the need for both savers and investors to review their options has really heated up. So to help you stay on top of all the action, we bring you a selection of the hottest savings and investment deals on offer this summer.

Interest rates

Since the recent reduction to a new record low for the Bank of England’s base rate, savings rates have started to fall at a significant pace. Needless to say the outlook for savers is not good, but it’s not just savings rates that are falling. Bond yields also face record lows whilst the share prices of many of the higher yielding FTSE 100 companies have gone up as more investors search for income. So the outlook is bleak for both savers and investors, and the need to make the most out of your capital has suddenly become priority number one this summer.

So what’s hot?

For many savers, longer term savings rates are not offering enough of an increased rate to justify tying your money up for longer, and so we see most activity is in the short term space, from instant access up to 2 years. Whilst as you might expect, with interest rates coming down, many savers inevitably start to consider taking on more risk with their capital in the hunt for higher returns, so we also cover some of our income and growth investment best sellers.

Combining every day banking with up to 5.0% interest

The fact remains that loyal bank customers are rarely rewarded and so usually face far lower rates on their savings compared to those who shop around. Well this is now also true of current accounts. Although historically these accounts have been renowned for offering very low rates of interest, this has started to change significantly in the last few years with some offering very competitive returns indeed.

Low monthly balance top pick – Nationwide’s FlexDirect account pays 5.0% AER fixed for the first 12 months on all in credit balances up to £2,500. Thereafter the rate reverts to 1.0% AER variable.

Higher monthly balance top pick – Santander’s 1|2|3 account pays 3.0% AER variable on your entire balance up to £20,000 provided your balance is at least £3,000. This rate is set to change to 1.50% AER on all balances up to £20,000 from 1st November 2016. It also offers some competitive cashback rates on a wide selection of household bills. A £5 per month account fee applies.

Instant access – market leading 1.20% AER variable

When longer terms savings rates are low, instant access accounts see far greater inflows as savers use this as a safety net whilst reviewing other options. The Freedom Access Account from RCI Bank is a market leading instant access account paying 1.20% AER variable and you can save from £100 up to £1m, with free and unlimited payments and withdrawals. RCI Bank is part of the Renault global banking group and so the first €100,000 equivalent is protected by the French deposit guarantee scheme (FGDR) rather than the UK FSCS.

For those where the UK FSCS is more of a priority, Aldermore’s Easy Access Account offers 1.00% AER variable on balances from £1,000 to £1m, whilst the B account is an innovative new banking service from Clydesdale and Yorkshire Banks which combines a current account with an instant access account, the latter offering 1% AER variable on all balances. The interest rates alone are worth a closer look but this account might particularly appeal to the more technically savvy saver due to the intuitive B banking app which forms part of the overall proposition.

Fixed rate bonds – short terms hit the top spots

Whilst instant access offers 1.20%, a top deal on a 5 year fixed rate is only offering 1.0% per year more at 2.20% AER. These are without doubt some of the lowest long term fixed rates in history and this 1% margin has resulted in more money staying in shorter term fixed rates. Here are our current top picks for those who can tie their money up for between 6 months and 3 years, all of which are eligible for the UK’s FSCS:

6 months top pick: Habib Bank 6 month Fixed Rate Deposit, offering 0.80% AER

1 year top pick: Bank of Cyprus 1 Year Fixed Rate Bond, paying 1.30% AER

2 year top pick: Bank of Cyprus 2 Year Fixed Rate Bond, paying 1.40%

3 year top pick: Bank of Cyprus 3 Year Fixed Rate Bond, paying 1.50%

The minimum deposit with Bank of Cyprus accounts is £10,000 whilst for Habib Bank it is £1,000. For those looking for a 1, 2 or 3 year fixed rate account with a lower minimum, Aldermore Bank pays 1.40% AER over 3years, 1.30% AER over 2 years and 1.20% AER fixed for one year, all with a minimum of £1,000.

Long term savings alternative – potential 24% growth return

For those looking for the potential for higher growth and are prepared to tie their money up for the longer term, the Investec 6 Year Defensive Deposit Plan offers an alternative that some savers might find attractive. By linking your return to the FTSE 100 Index, this deposit plan offers the potential for a 24% fixed return, which is paid provided the value of the Index at the end of the plan, is higher than 95% of its value at the start of the plan (subject to averaging). So the FTSE can fall up to 5% and you still receive the fixed return. However, if the Index is lower, you will only receive a return of your original capital.

The best long term fixed rate savings bonds are paying around 2.20% AER whilst by linking your deposit to the FTSE, if this Deposit Plan pays out the 24% return is equivalent to 3.65% AER. With record low longer term fixed rates forcing some savers to consider a wider range of options, the combination of capital protection plus the potential for a high growth return could be a compelling opportunity. Taxpayers can also benefit from tax free growth as the plan is also available as an ISA.

Fixed income investment

Another consequence of this sustained period of low longer term fixed rates is that savers start to consider taking on more risk with their capital in the hunt for higher returns. One such plan that has been popular in this area is the Enhanced Income Plan from Investec Bank. Unusually for an investment, it has a fixed term and offers a fixed income each year, paid to you regardless of the performance of the stock market. It also pays income each month which is the most popular payment frequency. The latest issue pays 4.92% per year, paid as 0.41% each month.

Also unusual for an investment is the inclusion of some capital protection, or ‘conditional capital protection’. This means that your initial capital is returned at the end of the investment unless the FTSE falls by more than 50% during the fixed term of the plan. If it does, and the Index also finishes below its starting level then your original capital will be reduced by 1% for each 1% fall, so you could lose some or all of your original investment.

Up to 6.0% investment income, quarterly payments

The Focus FTSE Quarterly Contingent Income Plan offers up to 6% per year which is higher than the income on the Investec plan however it is not fixed, but rather dependent on the performance of the FTSE 100 Index. A quarterly payment of 1.50% is made provided the value of the Index at the end of each quarter is at or above 75% of its value at the start of the investment. If the Index is below 75% of its opening level, no income payment will be made for that quarter.

Your initial investment is returned in full unless the FTSE has fallen by more than 40%, measured at the end of the fixed term only. If it has fallen below this level, capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.

Both of these plans are available as an ISA and accept ISA transfers, in which case your income would be tax free.

Defensive growth plans

Finally, in the investment growth space, defensive plans have been popular on the back of the UK’s decision to leave the UK and the uncertainty around what impact this might have on our growth and economic prospects. These defensive plans offer the potential for investment level returns even if the stock market goes down, in some case by up to 50%. They are therefore proving popular with investors concerned about the historically high level of the FTSE and would therefore like to include a defensive element to their investment. This plan may appeal to those who think the FTSE might fall slightly, stay the same, or rise in the coming years but not significantly.

Defensive Kick Out top pick: Investec’s FTSE 100 Step Down Kick-Out Plan offers the opportunity for 8.0% for each year invested (not compounded) even if the FTSE falls up to 20% over the term of the plan. Capital is at risk is the FTSE falls by more than 50%.

Fixed term defensive growth top pick: Investec’s FTSE 100 Defensive Growth Plan offers a 33% fixed return at the end of the plan, provided the Index it at least half its value at the start of the plan (i.e. it can fall up to 50% and you still receive the 33%, along with a full return of capital). Your capital is at risk if the FTSE has fallen by more than 50%, in which case you could lose some or all of your initial investment.

 

Compare our Top 3 current accounts »

Compare instant access accounts »

Compare fixed rate bonds »

Compare income investments »

Compare growth and defensive growth investments »

 

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 is the interest you will receive before tax is deducted.

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular plan. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek professional advice.

Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.

The investments in this article are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index or shares listed within the Index. As share prices can move by a wide margin, plans based on the performance of shares represent higher risk investments than plans based on the FTSE 100 Index as a whole.

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

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 Focus: RCI Bank’s market leading instant access and fixed rate selections

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RCI Bank is a relative newcomer to the UK, but is currently offering some of the best deals out there. We take a closer look at their story as well as reveal their market leading and award winning instant access account and their top fixed rate bond deals.

RCI Bank

The story behind RCI Bank is a unique one since it originated from the Renault Group, one of the world’s largest car companies. Developed as their own internal bank, RCI Banque was founded in 1974 and was created in order to meet the need to help customers finance their vehicles. Forty years later and the RCI Banque group is still privately owned by the Renault Group and operates in 37 countries across every continent, lending over €12 billion a year. RCI Bank launched in the UK in 2015 in conjunction with RCI Financial Services who combined have over 200 staff and lend over £2 billion each year.

Current selections

Despite only launching earlier this year, RCI Bank already has a compelling range of award-winning products. With a range covering a market leading instant access account and fixed term savings accounts up to two years, the focus is on relatively short term cash, which should appeal to anyone with half an eye on future interest rate rises.

Market leading instant access: offering 1.65% AER

The Freedom Savings Account is currently offering 1.65% AER variable gross, which is market leading for this type of account. This top rate is available to both new and existing customers and is free from notice periods, penalties, bonus periods, tiered rates and fees (although a £15 fee for CHAPS transfers applies). What you see is what you get, which perhaps also explains why it has been given a Moneyfacts rating of Outstanding*.

The account is available as a single or joint account and is free to use so you can make unlimited payments and withdrawals without charge. You have the option of interest being paid monthly or annually which will also compound provided you don’t move it to another account. There’s no limit or fees on the number of withdrawals you can make and it can be opened with a low minimum of just £100. You can apply online and RCI Bank state opening an account takes less than 15 minutes, whilst you also benefit from full UK customer support available 7 days a week

Click here to find out more about the RCI Bank instant access account »

 

RCI Bank short term fixed rate bonds: up to 2.35% AER

For those who are able to tie their money up for a fixed period and are also looking for a competitively priced fixed and regular rate of interest, RCI Bank also offers a duo of fixed rate savings accounts, over one and two years respectively. As you would expect, the rate of interest increases with the fixed term, the 1 year fixed term deposit offering 2.06% AER while the 2 year fixed term deposit is currently paying 2.35% AER. Both accounts have a Moneyfacts rating of Excellent*.

These fixed term deposits offer a guaranteed rate so you’ll know exactly how much you will earn by the end of the fixed term, whilst interest can be paid monthly or annually and can be compounded. Both deposits also give you the flexibility of unlimited top-ups for 30 days from your application however you cannot close your account once opened or make a withdrawal before the end of the term. You can apply online and the account has a low minimum of £1,000.

Click here for more info on the RCI Bank 1 Year Fixed Term Savings Account »

Click here for more info on the RCI Bank 2 Year Fixed Term Savings Account »

 

Deposit Guarantee Scheme

Deposits held with RCI Bank are not covered by the UK Financial Services Compensation Scheme but instead fall within the scope of the French deposit protection scheme, known as the FGDR or Fonds de Garantie Dépôts et de Résolution. Eligible deposits with RCI Bank are protected, and all of the accounts above are covered by the FGDR, protecting the first €100,000 per customer within the RCI Banque group. As with the FSCS, the protection covers each customer rather than each account and for joint customers, each customer is protected up to €100,000 (so up to €200,000 between them). Since the maximum eligible is based in Euros, the UK sterling equivalent at any given time will depend on the exchange rate between the British Pound and the Euro.

Further information – FDGR

Created by law, the FGDR compensates depositors for an amount up to €100,000 per person, per institution, when a banking institution fails. This guarantee benefits all bank customers, private individuals, businesses of any size and associations. For more information and to check their status, visit www.garantiedesdepots.fr/en.

* Moneyfacts awards valid as at 01.10.2015

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 Bank fixed rate selections offering up to 2.35%

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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.

All the Investec savings accounts featured below are covered by the Financial Services Compensation Scheme (FSCS). Please be aware that the FSCS limit for deposits are due to change after 31st December this year.


Investec Bank fixed rate bonds – up to 2.15% AER

For those who are able to tie their money up for a fixed period and are also looking for a fixed and regular rate of interest, Investec offers a trio of fixed term deposits with terms of one, two and three years.

As you would expect, the rate of interest increases with the term – the 1 Year Fixed Term Deposit has been the most popular with savers and pays 1.95% AER, while the 2 Year Fixed Term Deposit pays 2.05% AER. Higher returns are available for those who are prepared to lock their money away for 3 years, with Investec’s 3 Year Fixed Term Deposit offering 2.15% AER.

Interest on all three fixed rate bonds can be paid annually or monthly, they 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 quickly and easily online.

Click here for more information on the Investec 1 Year Fixed Term Deposit »

Click here for more information on the Investec 2 Year Fixed Term Deposit »

Click here for more information on the Investec 3 Year Fixed Term Deposit »


Investec 3 Year Base Rate Plus Account – minimum 2.35% AER

For those who want to take advantage of increases to the Bank of England Base Rate but still want the convenience and security of a minimum fixed return, Investec have shown some welcome innovation in the market with their 3 Year Base Rate Plus.

Perhaps the most popular of Investec’s current savings range, this account pays 0.5% AER/variable above the Bank of England Base Rate for 3 years but with a minimum rate of 2.35% AER, so whatever happens you know you will never earn less than this.

This account therefore offers you the chance to take advantage of any future Base Rate rises over the next three years whilst also offering the safety net of a minimum return. Interest is not compounded and will be paid into your nominated account annually. No early closure or withdrawals are permitted and you can apply easily online.

Click here for more information on the Investec 3 Year Base Rate Plus »


Investec 2 Year Double Base Bond

Finally, for those prepared to tie their money up for 2 years but who also consider an increase in the Bank of England base rate is likely, Investec have shown further innovation with their 2 Year Double Base Bond. This account pays double whatever the Bank of England Base Rates is during the 2 year fixed term, plus an additional 0.50% on top. This means currently you would receive 1.50% (variable).

If the Bank of England Base Rate increased by 0.25% the variable rate would increase to 2.0% and if the Base Rate rose by 0.5% then your variable rate would increase to 2.5%. Investec’s current 2 Year Fixed Term Deposit is offering 2.05% fixed. No early closure or withdrawals are permitted during the term of the plan and interest will be paid annually into your nominated account. Access to you account is via online and telephone banking and you can apply easily online.

Click here for more information on the Investec 2 Year Double Base Bond »


Investec Bank plc

Investec is an international, specialist bank and asset manager with its main operations in the UK and South Africa. The group was established in 1974 and as at April 2015, currently employ around 8,200 people and look after £124.1 billion of third party assets under management. They provide a range of financial products and services and specialise in a number of areas, particularly within the banking sector. Their UK banking operation, Investec Bank plc, looks after £10.3 billion of customer deposits. They are also a market leading provider of investment plans and structured deposits.

Click here to compare all Investec savings accounts »

Click here to compare all Investec structured deposits and investment plans »

 

No news, feature or comment should be seen as a personal recommendation to invest. If you are at all unsure of the suitability of this type of investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

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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