One of the many side effects of the current economic environment is the impact it has had on fixed rate bond yields, particularly those with a term of 3 years or more.
The all too familiar landscape of low interest rates and increasing inflation is painfully consistent, but the real impact is only now really beginning to take shape with the UK saver which as a result has brought into the spotlight the need to find viable alternatives.
The economic backdrop
The combination of another ‘hold’ decision by the BOE earlier this month, the need to head off the increased focus of a double-dip recession and a further £75billion in quantitative easing has had a marked effect on the outlook for savers.
We knew already that the golden age of 7%+ on fixed term deposits was long gone but what these latest events confirm is that it is looking less likely than ever before of coming back any time soon. This also means that there are even greater pressures on savers to take a long hard look at how they split their money.
Inflationary pressures squeeze fixed rates more than ever
The Office of National Statistics today launched the most recent inflation figures with the Consumer Price Index (CPI) rising to 5.2%, a startling jump of 0.7% on the previous month and matching the highest level ever seen. This means that all except non-taxpayers must achieve a fixed rate of at least 6.5% just to keep the spending power of your money standing still. Two years ago CPI was only 1.1%, so not only has the pressure on savers increased significantly, there is little on the horizon to suggest a change in the near future.
In the medium term, the benchmark for comparison purposes is our current leading 3 year fixed rate, which is 4.15% provided by Vanquis Bank. Two years ago you could have obtained at least 4.5% from a range of lenders. Over the longer term, our leading 5 year fixed rate from Scottish Widows offering 4.6% has received huge interest but even this falls short of providing the ever-important hedge against inflation.
Structured Deposits gaining in popularity
Without a doubt, fixed rate bonds are an important part of the savings jigsaw, but their status as the only option should be carefully considered in light of the economic reality that affects every saver in the UK.
One of the benefits of being in the UK is that we have depth and innovation in financial services and this often results in there being alternative solutions to consider. The challenging economic environment and continued inflationary pressures has resulted in a significant growth of interest in the structured deposit.
These products combine capital protection with the potential to receive higher rates than are available from fixed rate bonds, some of which also have the potential to beat inflation but without putting your capital at risk.
They can provide income or growth and generally range from 3 years to 6 years in term. They are usually available as Cash ISAs and are eligible for the Financial Services Compensation Scheme which covers claims up to £85,000 per individual.
Market round up
For those looking for income, Meteor’s Income Deposit Plan offers the opportunity for an attractive 7% for each year the FTSE stays between 4,250 and 7,250 and uses the Royal Bank of Scotland as the deposit taker.
The ability to mature early is a feature which is unique to structured products. Gilliat’s Deposit Kick Out provides potential growth of 10% per annum with the opportunity to mature early each year dependent on the performance of five FTSE 100 shares, whilst Investec’s Kick Out Deposit provides a potential return of 5.75% per annum for each year the plan has been in force and will mature early (after year 2) dependent on the FTSE 100 Index finishing higher than it’s starting value. Both of these plans have 5 year terms.
Looking to the shorter term, Investec also has a 3 Year Deposit Plan which offers a fixed return of 17.5% if the FTSE 100 finishes higher at the end of the term than it’s starting value. Compare this to the returns on offer from three year fixed rate bonds and this starts to stand out as a viable alternative. There are also plans available from other institutions such as Cater Allen and Legal & General.
As can be seen, the market for these products has grown substantially in the last few years with major banks (such as Royal Bank of Scotland and Santander) providing the financial strength on the deposits, thus providing peace of mind to the investor and making them a viable option when considering how best to spread your savings.
No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.
These 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.
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