The last month has seen some subtle changes in the economic landscape but whether this has had any impact for those looking for a competitive savings plan is another matter. We take a look at the best the fixed rate bond market has to offer and compare these to a number of alternatives which continue to rise in popularity.
Last week saw the Bank of England retain interest rates at 0.5% for the 39th consecutive month. This was certainly expected, as it followed the recent announcement by Sir Mervyn King, governor of the Bank of England, that there would be no expected change to interest rates through 2013.
However, the International Monetary Fund has been putting pressure on the Bank to consider cutting interest rates further as well as looking at more quantitative easing in order to stimulate the economy on the back of a revised growth forecast for this year down from 1.2% to 0.8%. This downward forecast was mainly due to the threat to the recovery posed by the eurozone crisis, which has subsequently been significantly increased by the €100 billion Spanish bailout.
Are you getting value for money?
All of these developments have provided further pressure on the economic outlook, with great uncertainty as to the real impact this will have. What is certain is that this has added to what was already a fragile savings environment making it more important than ever to review the interest rate you are receiving and challenging whether this is offering good value for money.
The only good news for savers is that the Consumer Price Index, the headline rate of inflation, came down 0.5% to 3%, a level not previously seen since March 2010, while the Retail Price Index dropped by a smaller amount to 3.5%, the lowest it has been since the tail end of 2009. But what has this done for the savings market – importantly, has it had a positive impact on the rates on offer?
Instant access and notice accounts
The current Post Office Online Saver is a highly competitive instant access account offering 3.17% gross. You can save from £1 and with online access to your savings the account also offers unlimited free withdrawals. The headline rate includes a 1.52% fixed interest bonus for the first 12 months so you will need to review your options after that time.
Higher rates are available for restricting the access to your money but rather than committing for at least a year, notice accounts offer an attractive balance of rate v commitment. Gilliat currently have two market leading notice accounts paying 3.30% AER on 120 days notice and 3.50% AER with 180 days notice. These are highly attractive rates when compared to short term fixed rates on offer and of particular note is that these are also available to businesses, charities and trusts.
Short term fixed rate bonds
United National Bank’s 1 Year Fixed Deposit is paying 3.45% with monthly or annual interest options and a minimum of £2,000, while tieing up your funds for 2 years will earn you 3.75% gross with Birmingham Midshires’ 2 Year Fixed Rate Bond. This account also offers monthly or annual interest and can be opened from as little as £1. Both of these fixed rates can be opened online.
Longer term fixed rate bonds
In the 3 to 5 year fixed rate market, slightly higher rates are available in return for locking your money away for the longer term. Birmingham Midshire features again offering 4.00% gross with its 3 Year Fixed Rate Bond with only a small premium available for locking in for a further year available via the Halifax 4 Year Fixed Online Saver which is currently paying 4.05% gross, fixed for 4 years and can be opened with a minimum of £500.
Halifax also offers our best 5 year fixed rate with its 5 year version of the Fixed Online Saver. This is offering 4.15% gross and has a minimum deposit of £500 but you are unable to make additional deposits, and withdrawals are not permitted with penalties for early withdrawal.
Fixed rate bond summary
Based on the above selections, the range of rates available from instant access to a 5 year fixed rate is between 3.17% and 4.15%. This equates to a difference of less than 1% which is a marked reflection of the challenges facing those looking to lend. The emphasis here is clearly on the short term.
However, the economic backdrop suggests little in the way of change any time soon which is a real cause for concern. Combined with great uncertainty of what lies around the corner, we should certainly be planning for the future but the premium for locking your money away is proving difficult to justify.
Fixed rate bond alternatives
This round up of the fixed rate bond market helps to explain the increase in savers looking for alternatives which combine protection of your capital with the opportunity to achieve higher returns that would be available from a fixed rate bond of similar duration.
The main difference with these plans is that your return is normally dependent on the future performance of an index, typically the FTSE 100, and if the performance is not as required, you will only receive your capital back or a lower return than the headline available. This is the trade off for the potential for receiving higher returns.
Investec’s 3 Year Deposit Plan has been particularly popular, since it is a 3 year plan which offers the potential for a 17% return at the end of the term, equivalent to 5.37% per year compound. In order to receive this return the FTSE must finish higher at the end of the 3 years than its starting value, with the final value of the FTSE subject to averaging. When compared to the returns on offer from leading three year fixed rates (currently around 4%) this potential upside becomes an attractive option.
For the longer term, the newly launched Cater Allen Growth Plan offers to return 1.2 times (120%) any rise in the FTSE over the term of the plan (subject to averaging), without any cap as to the potential returns. Cater Allen is part of the Santander group which provides the capital protection and FSCS eligibility and so if you are confident the FTSE will rise in the medium term, this plan could be an attractive addition to your savings options.
Other options available
There are a number of other options available including Investec’s Kick Out Deposit Plan which can mature early from year 2 if the FTSE is higher than its starting value and return 5.75% for each year it has been in place, and Cater Allen’s Annual Locked In Returns Plan which locks in 6.50% for each year the FTSE is higher than its value at the start of the plan.
When considering your options and how best to spread your savings, the current economic outlook suggests that these alternatives deserve closer attention and with the ability to utilise your Cash ISA allowance and make Cash ISA transfers, you have plenty of choice available.
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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. Tax treatment is dependent on your individual circumstances and may change.
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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