Posts Tagged ‘saving for the future’
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.
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 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.
Last updated: 25/10/2016
With more and more high interest current account providers announcing reductions to their interest rates, the 5% fixed for 12 months from Nationwide now looks even better than before. Here we take a more detailed look at the pressures savers are facing in these difficult economic conditions, as well as help reveal why the FlexDirect continues to be our best selling current account.
Nationwide FlexDirect account summary
- 5.0% AER (4.89% gross p.a.) fixed for 12 months
- Paid on balances up to £2,500, no interest paid above this amount
- 1.0% AER variable on balances up to £2,500 after 12 months
- You must pay in £1,000 per month to qualify
- No requirement to set up direct debits
- Contactless Visa debit card available
- 12 month fee-free arranged overdraft available
- Free text alerts to help you manage your account
- No monthly account fee
- Covered by the Current Account Switch Guarantee and Financial Services Compensation Scheme
Savings rates in dire straits
Our market leading instant access account (RCI Bank Freedom Savings Account) is currently paying 1.0% AER variable, whilst our best long term fixed rate (Vanquis 5 Year Fixed Rate Bond) will get you 1.95% AER – that’s an increase of less than 1% per year for tying up your money for five years, albeit the rate from Vanquis is fixed for the full term. Then of course there are a load of accounts offering rates in between these, mainly fixed rate bonds of different durations. It may be repeated far too often, but unfortunately it makes it no less true – savings rates are at record lows – and it would seem this at the very least, this is set to continue, and possibly get even worse.
Inflation into the mix
If record low savings rates weren’t enough to worry about, the Consumer Price Index rose from 0.6% to 1.0% in September, the biggest monthly rise in more than 2 years and its highest level for 22 months. Since this rise, less than half of all savings accounts are able to match or beat this level, which means many savers are seeing the value of their cash eroded in real terms. According to the Bank of England, the average easy access account now pays under 0.3%, and with further cuts to savings rates on the cards, inflationary rises are a serious cause for concern.
High interest current accounts
Although historically, current accounts offered little if anything in the form of interest on your account balance this has changed significantly in the last few years, and against this harsh economic backdrop for savers, it is hardly surprising that the high headline rates of interest on offer have made compelling reading. Indeed, high interest current accounts have been one of the most popular safe havens for those looking to combine all of the usual account features you would expect from a full banking service with a highly competitive rate.
5% fixed for 12 months
Top of the rate table is Nationwide’s FlexDirect account which offers 5.0% AER (4.89% gross p.a.) fixed for the first 12 months. This rate is paid on all in-credit balances up to £2,500 and you must pay in a minimum of £1,000 per month to qualify (this excludes internal transfers). After 12 months the rate reverts to 1.0% AER variable. There is no monthly account fee, and with top rates on instant access and fixed term deposits ranging between 1.0% and 1.95%, it is easy to see why this account has attracted so much attention.
Others falling short
TSB Bank also offers 5.0% AER but this is variable and is only paid on balances up to £2,000, rather than the £2,500 on offer from Nationwide. The rate is, however, paid ongoing rather than for a fixed period of 12 months. But TSB has recently announced that with effect from 4th January 2017, the rate will reduce to 3.0% AER variable and will only be paid on balances up to £1,500. This follows in the footsteps of Santander who announced back in August that the 3% top tier interest rate on its flagship 1|2|3 Account would be halved to 1.50%, taking effect from 1st November this year. Lloyds has also announced that the rate on their Club Lloyds current account will halve from 4% to 2% in January 2017.
So whilst Nationwide’s main competitors are reducing their rates, this makes the FlexDirect offering even more competitive, especially since the rate is fixed for the first 12 months. Currently we are not aware that Nationwide has any plans to reduce its rate, although they state their rates are constantly under review.
Fair Investment view
Commenting on the account, Oliver Roylance-Smith, head of savings and investments at Fair Investment Company said; “The FlexDirect from Nationwide offers a market leading interest rate on balances up to £2,500, although the £1,000 you are required to pay in each month is at the higher end compared to other current accounts offering competitive interest rates. There is also no monthly account fee, so all of the interest earned goes straight into your pocket. Although the rate drops to 1% variable after the first 12 months, this is still considerably more than most other current accounts and on a par with some of the top instant access accounts currently on offer. With the Current Account Switch Guarantee running alongside, there really is no excuse to finding out more.”
Santander still the top choice on larger balances
With effect from 1st November, Santander’s 1|2|3 account offers 1.50% AER variable on all balances up to £20,000. If you were to compare this with the best instant access accounts on offer, it would be a clear market leader, albeit with the cap on the amount you can earn interest on. You can also earn up to 3% cashback on selected household bills such as council tax, gas and electricity, broadband, mobile phones and more. You must pay in at least £500 per month and have at least two active direct debits to receive interest and cashback. There is also a £5 monthly account fee, which may be cancelled out if you make the most of the cashback on offer – their site has a simple calculator to help you work out how much cashback and interest you might earn, versus this monthly cost.
A note on the Personal Savings allowance
Remember that since the start of the current tax year (6th April 2016), most people receive a personal tax free allowance for interest earnings on savings. For basic rate taxpayers this is set at £1,000 each tax year, whilst higher rate taxpayers get an allowance of £500. Beyond these allowances, basic rate taxpayers will pay 20 percent on savings income and higher rate taxpayers pay 40 percent. Additional rate tax payers will not receive a personal allowance. Also note that income from ISAs does not count towards your Personal Savings Allowance (it’s already tax-free).
An important part to play for savers?
Even with the Personal Savings Allowance, there is no doubt that every penny counts in these days of record low rates, creeping inflation and economic pressures all round, and so the returns on offer from the best high interest current accounts cannot be ignored. 5% on £2,500 equates to £125. Our market leading instant access currently offers 1.0% and so you would need £12,500 in that account to achieve the same level of return. Although these are first and foremost current accounts, they also have every right to be considered amongst the range of options for savers.
Apart from the low interest rates generally on offer, one of the main reasons many of us have stayed with our current account provider far longer than other type of account, is the fear that something would go wrong with the direct debits associated with our account. However, since the introduction of the current account switch service in September 2013, the whole process of switching banks is easier and will now be completed in seven working days – the 7-Day Switch.
Over 40 banks have signed up to the service (including Nationwide and Santander), which makes sure that all outgoing payments, such as standing orders and direct debits, will be transferred across to your new bank on your behalf. The service also guarantees that should any incoming payments be sent to your old account in error, these will be automatically redirected to your new account for up to 36 months after your switch date. This means the banks do all the hard work for you, making switching smoother and faster.
To switch or not to switch?
The 7-Day Switch rules therefore offer peace of mind to anyone considering a switch from their current account provider. However, you don’t necessarily have to switch your current account – although Santander requires you to have at least two active direct debits, Nationwide does not and so if maximising interest is your top priority, you could also consider taking one of these accounts out in addition to your existing current account, thereby leaving everything you already have in place. You will of course have to make sure you pay in the minimum amount required each month in order to earn the level of interest on offer.
Could you get more from your current account?
Many existing accounts pay no interest at all, so with up to 5.0% available it is always worth comparing what the market has to offer. Staying put simply because you have all of your direct debits set up is no longer a valid reason, especially since the introduction of the current account switch guarantee (see below for further details). As a minimum, these accounts should be considered an important contributor to the overall returns from your savings.
Click here for more information on Nationwide’s FlexDirect account »
Click here for more information on TSB’s Current Plus account »
Click here for more information on Santander’s 1|2|3 account »
Click here to compare high interest current accounts »
Please note that all rates and charges quoted are subject to change.
Overdrafts are only open to customers aged 18 or over and are subject to approval.
AER stands for 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.
One of the most interesting developments to come out of this year’s Budget is the announcement of a new category of ISA, the Lifetime ISA. Although some of the detail is yet to be finalised, we should all take note of the potential for a bonus of up to £32,000 in cash from the government, and so here we take a quick tour of what we know so far…
Lifetime ISAs are due to launch in April 2017, which coincides with another significant increase in the ISA allowance, as it rises from its current level of £15,240 to £20,000 from the start of the next tax year. So whilst all contributions into a Lifetime ISA will count towards the total amount you can contribute into an ISA, savers will have another £4,760 of ISA allowance at their disposal.
The Lifetime ISA will provide a new way for those aged between 18 and 40 to save for both the purchase of their first property and their retirement simultaneously, with both cash and investment versions to be available. In addition to benefitting from the tax-advantages of an ISA, savers who use the account in certain ways could also retain a 25% bonus from the government on their contributions.
Who can use them?
To qualify you simply need to be aged 18 or over and under 40 on the date you open an account. They can be taken out in addition to a standard Cash or Investment ISA, as well as the current Help-to-Buy ISA. You can also open a Lifetime ISA even if you already own a property.
How will they work?
From its launch eligible savers will be able to contribute up to a maximum of £4,000 a year into a Lifetime ISA, however contributions made into the account before the holder’s 50th birthday will be eligible to receive the 25% government bonus – this essentially means they could gain an additional £1 for every £4 saved. This bonus element is not included as part of your annual ISA allowance.
The account will therefore have a maximum individual contribution limit of up to £128,000 (if you put in the maximum amount of £4,000 for every year between ages 18 and 50) which can be matched by the government bonus to a maximum of £32,000, giving a total of £160,000. The bonus will also be added each year, so you can earn interest or investment growth on it thereafter.
Getting the bonus payment
In order to retain the 25% bonus payments there are specific rules about how and when the savers need to use the capital within the account. Two scenarios are eligible, the first being anyone under the age of 60 using the proceeds towards purchasing their first property, and the second is anyone over the age of 60 using the funds to support their retirement.
Before the account holder is aged 60 years or over the only way to receive the bonus on their savings is to use the money within the account to purchase a property as a first-time buyer, either outright or using it for the deposit on a mortgage. In this instance the money will be paid directly to the person carrying out the conveyancing for the new home.
A first-time buyer is considered someone who has never owned property before whether in the UK or elsewhere, and in order to receive the bonus the property is also restricted to having a maximum value of £450,000 no matter where it is in the country. This is different to the current Help-to-Buy ISA which limits the property value to £250,000 if outside of London. The buyer must also be intending to live within the property so investment properties such as Buy to Lets would not be eligible for the bonus.
As the Lifetime ISA is an individual product couples are permitted to have one each, which means that a couple could generate up to £64,000 in a bonus payment towards the acquisition cost of their first home. In cases where one member of a couple has previously owned property but the other has not, they will still be able to benefit from one member using their Lifetime ISA to help fund the purchase.
Once the account holder reaches 60 years old they will be able to receive the bonus upon any full or partial withdrawal. The account proceeds can be used for any purpose and will be paid free of tax. Funds can also remain invested and any interest and investment growth will continue to be tax-free – this includes any capital left over in the account if the Lifetime ISA holder already used it to fund a ‘bonus-eligible’ first property purchase.
Savers looking to make a withdrawal before their 60th birthday for reasons other than their first property purchase will be permitted to do so, but they will have to repay all the money added to the account by the government. They will also incur a 5% charge upon the amount withdrawn – an early redemption penalty.
Lifetime ISAs and Help-to-Buy ISAs
You can have both a Help-to-Buy ISA and a Lifetime ISA, however you are only permitted to use the bonus of one of the accounts to purchase property. Before Lifetime ISA’s launch it is also possible to save with a Help-to-Buy ISA in the meantime and then transfer it into a Lifetime ISA when they launch.
Fair Investment view
Commenting on the Lifetime ISA, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited said: “The idea of a 25% uplift towards a deposit for buying your first home will be attractive to some, but it is those with half an eye on their retirement years that could really benefit. Building up a pot in a tax-efficient environment over which you have complete control as to how much you take out and when is an attractive proposition. Add in the 25% bonus and the fact that any interest or investment growth will be compounded over time, and you could potentially end up with a sizeable tax-free pot to complement any other retirement provision.”
He continued: “Assuming you started your Lifetime ISA at age 35 and paid in £4,000 each year for the next 15 years, which would have another £1,000 per year added to it by the government. Not only would you have received £15,000 in bonus payments, but if your fund had grown at 5% each year (net of charges), at age 60 your pot would be worth almost £200,000, all of which would be available to take completely tax free, as and when you wish.”
Click here to compare our selection of Cash ISAs »
Click here to compare our selection of Help-to-Buy ISAs »
Click here to compare our selection of Investment ISAs »
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. The example used in this newsletter is for indicative purposes only and all funds will contain their own risk element in relation to growth and performance. If you are at all unsure of the suitability of a particular product, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.
As the Bank of England’s Monetary Policy Committee (MPC) has now held the base rate at 0.5% for over six and half years (the last vote was the 79th month in succession), we take a look at if there is any chance of a rise in sight and what the current outlook might mean for savers.
When will interest rates rise?
One committee member, Ian McCafferty, once again dissented from the other 8 members of the MPC and argued that the base rate should climb by 25 basis points (a quarter of a percent) to counteract any potential risk of inflation leaping beyond the 2% target in the medium term. However, despite Mr McCafferty’s dissension, most economists are still predicting that any rise in the base rate will not occur until early next year, a consensus predominantly based on beliefs that the UK’s growth will improve in its third quarter seeing price inflation rise gradually from the end of 2015.
Rather bleakly Bank of England Chief Economist Andy Haldane last month stated that “the case for raising UK interest rates in the current environment is, for me, some way from being made. One reason not to do so is that, were the downside risks I have previously discussed materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target.”
The International Monetary Fund (IMF) also warned at the end of its recent meeting in Lima that central banks risk another crash in the global economy if they do not continue to support growth with low interest rates. The future therefore remains uncertain although any interest rate rise, let alone a rise by more than 0.25 percent, seems very unlikely in the foreseeable future.
Latest inflation figures
The headline rate of UK inflation as measured by the Consumer Price Index (CPI) had been expected to remain at zero when official figures for September were released today (13/10/2015) however, the latest figures from the Office of National Statistics revealed a return to negative inflation as the rate fell to -0.1% today, the main contributors being a smaller than usual rise in the clothing prices and falling motor fuel prices. This will have a direct impact on the annual uprating of some benefits, of particular note the state second pension, which is linked to the September CPI rate.
The unemployment rate in the UK decreased to 5.5% from 5.6% in the previous period. Over the last 12 months employment levels are considerably higher with over 350,000 more in work than in the same time last year, signaling further strength of the labour market. The private sector’s annual pay growth has also risen and now exceeds 3%, however the Bank of England stated “Encouraging improvements in productivity growth have so far limited the impact of that pickup in pay growth on businesses’ overall costs, and therefore inflation.”
Short term view
In their latest report, the MPC stated the UK’s economic growth is experiencing a ‘gentle deceleration’ after peaking in 2014 and that it will ease back if the global economy weakens. However the central bank also reports that pressures in the UK’s labour market have been rising too slowly for inflation to return back to the 2% target, meaning it will likely stay below 1% until at least spring of next year.
Worst case scenario?
Against this economic backdrop, savers must consider that even when interest rates do begin to rise, will this in itself affect savings rates for the good? Certainly the traditional relationship between the Bank of England base rate and savings rates has been severed for some time and there is nothing in the economic outlook that suggests this will restored any time soon.
Savings rates in dire straits
Interest rates fell dramatically from when the Government’s Funding for Lending Scheme came into effect back in August 2012. This gave banks and building societies a cheap source of finance so they are not so reliant on savers to lend them money. Since then, banks and building societies have held a series of cuts to new savers and often, once they find themselves at the top of the best buy tables, they lower their rates to new savers as well.
Despite the introduction of so called ‘challenger banks’ into the hunt for our hard earned cash, whilst the Bank of England base rate has remained unchanged at 0.5%, interest rates remain at shockingly low levels by historical standards, which continues to pose difficult questions for savers.
Headline returns on fixed rate bonds, the traditional mainstay for many savers’ portfolios, remain poor. Leading one year fixed rate bonds currently offer around 2.10%, two year fixed rates around 2.35%, three year fixed rates around 2.70% and around 3.10% if you can fix for five years. This means that many maturing bond holders are still looking at sizeable falls in income when considering taking out another bond of similar duration.
Savers in trouble
The result is that many have moved away from longer term fixed rates in favour of instant access or short term fixes on the basis that something will happen relatively soon which will then spur them on to take further action. Although understandable, the above economic snapshot highlights this could be a very dangerous strategy indeed.
There are a number of alternatives available to traditional fixed rate savings plans. Since the returns are not always guaranteed, these are not for everyone and are unlikely to be the home for your entire savings pot. However, they do offer the potential for higher returns and with the current outlook for savers looking set to create further challenges, could be a worthwhile and timely consideration. Like fixed rate bonds, your initial capital is protected and is eligible for FSCS compensation up to the normal savings limits.
Diversifying savings portfolios to include a wider range of options offers the potential to provide the level of returns savers may need over the longer term. Indeed, with the current spread of low savings rates on offer, this is the only way to attempt to mirror the yields of yester-year, previously offered by the more traditional savings plans.
Weigh up the options
Ultimately, which option or blend of options will depend entirely on your individual circumstances however, these remain unusual and challenging times and traditional savings accounts are currently falling short of meeting the pressures put on saver’s capital by the continuing economic situation. As a minimum we should make sure that all of the options available are weighed up very carefully indeed.
Compare instant access savings »
Compare fixed rate saving »
Compare alternatives to fixed rate savings »
Compare peer to peer savings »
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.
Whether investing inside or outside of an ISA, the hunt for income remains a top priority for many investors, as evidenced by the number of our existing customers and those new to Fair Investment looking for income solutions. With the frequency of payments one of the most important features for many income seekers, we have put together a selection of our most popular monthly income investments. We also give you our in-house view of each from Oliver Roylance-Smith, our Head of Savings and Investments. For those who are yet to use their ISA allowance, all of the investments featured are also available within an ISA so you could benefit from tax free income.
Income a top priority
Whether you are an experienced investor or new to saving for the future, those needing income from their capital covers a wide range of scenarios, some of which may apply to you right now:
- I am working and need to supplement my income
- I am retired and need an income from my savings
- I have an instant access Cash ISA but the level of interest has dropped significantly
- I have an Investment ISA that is not yielding what it used to
- I have a maturing fixed rate Cash ISA and the equivalent rate for the same term again is significantly lower
- I am struggling to find a fixed and regular income from my capital which is competitive
Both savers and investors
With cash continuing to offer record low rates, even if you tie yourself in for the longer term, many savers are being driven to join income investors in the hunt for higher yields. What is clear is that regardless of the prevailing economic conditions, income remains a top priority for both savers and investors.
Although many income investors have historically looked to UK Equity Income funds to provide an
income, with typical yields on these funds currently under 4%, this may not be providing the level of income required and investors may well be questioning whether capital growth will do enough to boost their overall returns.
When reviewing the options available, those seeking income from their capital often take into consideration the level of income on offer, the frequency of payments as well as the overall risk versus reward offered by the investment. But with equity funds only offering quarterly income at best and many only paying twice each year, monthly income investments have an obvious appeal for those after a regular income.
Our selection of income investments is based on the main features investors usually look for when it comes to finding the best income opportunities available. From high levels of fixed income paid regardless of the performance of the stock market, to high yielding bond funds which diversify your investment across a large number of holdings, all of them have one thing in common – monthly income.
The Enhanced Income Plan from Investec continues to be one of our best sellers for those investing both inside and outside of an ISA. One of the main appeals for income seekers is that the income is fixed and therefore paid to you regardless of the performance of the FTSE – you therefore know exactly how much you will receive, when and for how long. The annual income is currently 5.40% (paid as 0.45% each month) which is high when compared to typical yields currently being paid by UK equity income funds. Capital is at risk if the FTSE drops by more than 50% during the plan and fails to recover by the end of the term, in which case your initial capital will be reduced by 1% for each 1% fall, so you could some or all of your initial investment.
Fair Investment view: “5.40% tax free income (if held in an ISA) is the equivalent of 6.75% taxable income for a basic rate tax payer and 9.00% for a higher rate tax payer. This high level of fixed income and the monthly payment frequency are popular features and with ongoing uncertainty around future interest rates and dividend yields, this plan offers a competitive balance of risk versus reward that could be considered by both savers and investors.”
Click here for more information »
The second income plan in our selection also offers a fixed income, paid to you regardless of the performance of the stock market. The FTSE 5 Monthly Income Plan from Meteor offers 7.20% annual income, paid as 0.6% each month. This level of income is significantly higher than Investec’s plan, one of the main reasons being that the return of your initial capital is dependent on the performance of five FTSE 100 shares rather the Index as a whole. Should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.
Fair Investment view: “The fixed income on offer equates to a total return of 43.2% over the term of the investment and if you invest within an ISA, the 7.20% fixed income is equivalent to 9.00% p.a. for basic rate tax payers and 12.0% p.a. for higher rate tax payers. This investment might well appeal to income investors looking for a high level of fixed and regular income however, the fact that the return of your initial capital is based on the performance of five shares rather than the Index as a whole should be a key consideration.”
Click here for more information »
This fund was launched in 1999 and is now almost £800 million in size. At 6.40%, the fund currently has one of the highest distribution yields* in the high yield sector and the monthly income frequency seems to be the favoured choice for our income investors, especially those looking to supplement income. The fund is managed by Barrie Whitman (since launch) and David Backhouse and has the simple aim of providing income. The fund invests at least two thirds of its assets in high income paying bonds issued by companies worldwide with the top three sector holdings covering media, services and telecommunications.
Fair Investment view: “The total number of bond issuers in the fund is currently 162 and the fund has produced a cumulative return of 7.4%, 23.3% and 56.9% over the last one, three and five years respectively. The high yield is achieved by investing predominantly in sub-investment grade bonds which are considered riskier than higher rated bonds but typically pay a higher income and so investors will experience some volatility. The fund is well diversified and is currently overweight in both banking and the European high yield market. The fund is Bronze rated by Morningstar OBSR.”
Click here to find out more and to apply »
Invesco Perpetual’s Monthly Income Plus fund has been popular with income investors for many years. Launched in 1999, the current management is split between Paul Causer, Paul Read and Ciaran Mallon who together have secured a Morningstar OBSR Silver rating. Now almost £4 billion in size, the aim of the fund is to achieve a high level of income together with capital growth over the long term by investing primarily in corporate and government high yielding debt securities globally as well as equities (up to maximum of 20%).
Fair Investment view: “Of the 382 current total number of holdings, just under 40% are with investment grade institutions with 16.75% of the fund invested in equities. The fund has produced 7.30%, 35.42% and 64.54% over the last one, three and five years respectively, outperforming its sector by some margin. It has a current distribution yield of 4.60% which is relatively low compared to the funds historical performance however the fund continues to be very popular with income seekers.”
Click here to find out more and to apply »
The two funds featured are open-ended collective investment funds which offer investors the ability to pool their money with others in order to invest in a large number of holdings, thereby diversifying their risk and accessing a far greater spread of holdings than would be available if investing directly. This offers savers another way of gaining access to the potential for higher income than available from cash.
The two fixed income investments are fixed term investment plans. These are an alternative to open ended investment funds, offering a defined return for a defined level of risk, thereby giving investors a further option to achieving income for their capital.
Investment plans versus investment funds
It is important to remember that income yields from investment funds are not guaranteed and are therefore subject to fluctuations. In addition, the treatment of your capital is different –fixed term investment plans contain what is known as conditional capital protection which means your initial capital is returned at the end of the plan term unless the underlying investment (either the FTSE 100 Index or five shares listed on the Index) has fallen by 50% or more. With investment funds your capital is fully at risk on a daily basis albeit your investment is spread across a large number of holdings, thereby diversifying the impact of one bond issuer failing.
Understanding how and when income is paid, as well as the treatment of your initial capital over time, are important considerations. The income yield as well as any rise or fall in the value of your original capital should always be considered together since both have an effect on your overall return. For example a 7% income yield might be compelling in its own right but not so if it coincides with a 7% reduction in the value of your capital. However, the total return can also work in your favour if capital growth is positive.
Click here for more information about the Investec Enhanced Income Plan »
Click here for more information about the Meteor FSTE 5 Monthly Income Plan »
Click here to compare monthly income funds »
* the distribution yield reflects the amounts that may be expected to be distributed over the next twelve months as a percentage of the Fund’s net asset value per share as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any initial charge and investors may be subject to tax on distributions.
Past performance is not a guide to future performance.
All fund data correct as at 31/07/2014.
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 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 value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Past performance should not be taken as a guide to the future and there is no guarantee that these investments will make profits; losses may be made.
The investment plans detailed are structured investment plans which 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. 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 future returns.
The latest HMRC figures for the 2013/14 tax year show that although there were fewer subscriptions into ISAs overall compared with the previous tax year, numbers into Stocks & Shares ISAs have grown significantly. We take a closer look at the numbers as well as find out which investments have been the winners from this shift in ISA behaviour and what this could mean for the New ISA going forward.
Low savings rates set the scene
With the Bank of England base rate held for another month at 0.5%, whatever the speculation around future interest rate rises, the facts remain that this record low is now in its 66th consecutive month and the savings rates available from Cash ISAs are still at pitifully low levels.
Figures released at the end of August by the Bank of England showed the rates on Cash ISAs have fallen significantly since 2012 and the introduction of the Funding for Lending Scheme. In July 2012, Cash ISAs offering a bonus paid an average rate of 2.57%% whilst today they pay just 1.18% on average – less than half what they used to. For Cash ISAs not paying bonuses the rate has fallen from 1.41% to 0.86% over the same period, a fall of almost 40%.
Fixed rates failing to inspire
And it’s not only easy access accounts that are failing to inspire savers. Top one and two year fixed rate Cash ISAs are paying around 1.70% and 2.0% respectively whilst leading 3 year fixed rate deals top 2.50% and for a 5 year term you might get 2.80%. The good news is that with inflation currently running at 1.6%, all of these fixed rates are inflation beating, but the ISA figures show us that this is clearly not enough for savers and investors looking to the longer term.
ISA numbers down, Investment ISAs up
The end of financial year ISA statistics from HMRC show that overall subscription numbers into ISAs has fallen year on year. Between 6th April 2013 and 5th April 2014 there were a total of 13,473 ISA subscriptions, down from 14,606 made during the previous tax year. With such historically low savings rates it is hardly surprising that the number of ISAs is down with Cash ISAs historically being the more popular of the two ISA options.
However, although the number of ISAs has fallen, the above statistics show that savers are putting more money away than ever before. The average amount invested in a Cash ISA rose from £3,501 last year to £3,704 this year, and the amount saved into Stocks and Shares ISAs increased from £5,629 to £6,163 over the same period, the latest ISA subscriptions revealing more investors have been allocating towards stocks and shares than buying into cash.
Savers put record amount in stocks and shares ISAs
According to the latest figures from the Office of National Statistics, the total assets invested into Stocks and Shares ISAs were a record £18.4bn in the 2013-14 tax year with £38.8bn in Cash ISAs, a change in attitude from 2012-13 when £40.9bn was subscribed into cash ISAs and £16.5bn was held in Stocks and Shares ISAs. This equates to an 11.5% increase on the investment side versus a 5.4% increase for Cash ISAs, over double the increase.
The environment of low cash ISA rates failing to meet the needs of many ISA subscribers has boosted stocks and shares ISAs to a record year of investment and the increase in average subscriptions to record levels shows not only the importance that UK savers and investors put on tax-free ISAs, but also that they are increasingly realising that this valuable tax break can be better used.
New ISA changes mean the trend is likely to continue
Since 1st July 2014, the key changes to ISAs are as follows:
- All existing ISAs become New ISAs
- New ISA allowance of £15,000
- Allocate up to the full allowance in either cash or stocks & shares (investments), or a mixture of both
- Freedom to transfer from cash to stocks & shares and vice versa (Stocks & Shares ISA to Cash ISA previously not permitted)
The continued poor savings rates and improved confidence in the markets, combined with the higher ISA allowance and greater transfer flexibility suggest that this trend will continue throughout the current tax year and beyond.
Confirmation that savers are looking to investments
Indeed, those who have half an eye on a potential interest rate rise may not want to lock into a fixed rate ISA in the short-term and what these latest figures confirm is that more savers are looking towards investments. As many banks cut their rates to deter attracting new savers and slash rates for existing customers coming to the end of their initial deal, it is the shorter term rates that are proving most uncompetitive as the prevailing market brings with it an ISA dilemma for many savers – either lose money in real terms from a savings account, or take on more risk.
This difficult question of taking on more risk to try and combat the effects of inflation and realise competitive returns over and above inflation is one which more and more savers are facing. Obviously putting your capital at risk is something which you should consider very carefully indeed, particularly if you are considering this for the first time with some of your Cash ISA savings or new ISA money.
Our Top 5 most popular plans for ISA investors
Here at Fair Investment Company we have also seen a rise in the number of investment plans being used by ISA savers and investors on the back of a very busy summer. With this in mind, here is our Top 5 investment plan selections based on our most popular plans with both existing and new investors:
- 5.40% fixed income, monthly payments with capital at risk based on the performance of the FTSE 100 Index – Investec Enhanced Income Plan » This is our most popular income investment and the best selling investment for those using the full £15,000 New ISA allowance
- 7.20% fixed income, monthly payments with capital at risk based on the performance of five FTSE 100 shares – Meteor FTSE 5 Monthly Income Plan » This is our second most popular income investment.
- Potential yield up to 9% each year with quarterly payments, capital at risk based on the performance of four FTSE 100 shares – Focus FTSE 4 Quarterly Income Plan » This is one of our most popular investment plans overall.
- Potential 10.25% annual growth (not compounded) and early maturity from year 2 onwards, capital is at risk based on the performance of the FTSE 100 Index – Investec Enhanced Kick Out Plan » This is best selling growth investment plan and the most popular investment for ISA transfers.
- Potential 7.50% annual growth (not compounded) even if the FTSE falls up to 10%, capital at risk based on the performance of the FTSE 100 Index – Investec Defensive Kick Out Plan » The third entrant from Investec offers a defensive element and is one of our most popular investment plans overall.
Don’t miss out
Recent research suggests that more than one in every four adults in the UK (26%*) is paying too much tax on their savings and investments. With as many as 12.5 million adults failing to make use of a tax-efficient ISA with their hard earned money, they could be losing out by paying tax unnecessarily. Putting money in an ISA is one of the simplest things to do to protect your money from the taxman and with the new ISA rules resulting in an increased allowance and increased flexibility, making sure you don’t miss out should be a top priority.
Click here for more information about the Investec Enhanced Income Plan »
Click here for more information about the Meteor FTSE 5 Monthly Income Plan »
Click here for more information about the Focus FTSE 4 Quarterly Income Plan »
Click here for more information about the Investec Enhanced Kick Out Plan »
Click here for more information about the Investec Defensive Kick Out Plan »
* NFU Mutual, June 2014.
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.
These 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. 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. 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. The past performance of the FTSE 100 Index or shares listed within the Index is not a guide to their future performance.
LV= and Just Retirement have each launched one-year fixed-term annuities in response to the recent post-Budget shakeup to the pensions system. The reforms, which come into force in April 2015, will mean that anyone aged 55 or over will be able to take their entire pension pot as cash if they wish to do so, rather than having to buy an annuity.
Bridging the gap
The new products launched by LV= and Just Retirement consist of one-year fixed-term annuities, and are designed for people at the brink of retirement who want to defer making a long-lasting decision about how they will take their pension income in retirement until new rules come into effect next year.
Pensions are being radically transformed under plans announced in the 2014 Budget. From April 2015, retirees will be given far more freedom over how they use their pension fund. Here we explain how the forthcoming changes could affect you.
How are pensions changing?
The most radical changes will come into force in April 2015. Upon reaching retirement age, savers will have access to all the money in their pension pots and will, after tax, be able to do more or less what they want with it.
Under current rules, savers can take up to 25% of their pension pot as a tax free lump sum upon retirement. If you want to take a larger lump sum, you can, but if you go above certain limits you have to pay a 55% tax.
Under the new rules, this facility will remain but the tax on withdrawing the rest of the cash will also be cut to standard income tax rates, making it easier for people to use their entire fund as they wish.
Following consultation with various stakeholders, the Treasury has announced that savings kept in a Child Trust Fund (CTF) will be transferable to a Junior ISA from April 2015 – much to the relief of many who had hoped for such an announcement in the 2013 Autumn Statement and were disappointed when this failed to materialise.
A better deal for young savers with Junior ISAs
Up to 6.1million children stand to benefit from this change, which will see them able to take advantage of the benefits offers by Junior ISAs such as better returns on their investment, lower charges, and a wider choice of products.
Junior ISAs were introduced in 2010, following the closure of the Child Trust Fund Scheme. Up to £3,840 per year can be put into a Junior ISA without tax being paid on any interest or gains. When a child turns 18, the Junior ISA account automatically becomes an adult account.