Savings Focus: 7% income opportunity for these difficult times

Savings Focus: 7% income opportunity for these difficult times

22 January 2013 / by Oliver Roylance-Smith

The challenges facing savers are probably at one of their highest points in history. For those who need to receive a higher return from their savings, gone are the days where this could be achieved simply by committing your capital for longer. Against this backdrop, we take a look at one solution, offering a potential 7% income, that is proving particularly popular.

Fixed rates underperforming

The current economic outlook for the UK is looking gloomy at best, and so the need for us to maximise the return on our capital is more important than ever before. But the market for high fixed rates for savers is not looking healthy. In fact, this is probably one of the worst times to be comparing rates in order to get a competitive deal.

There is little paying above 3% currently available and that is regardless of how long you are prepared to commit your capital for. This provides little or no hedge against inflation which is of course a major concern for all of us. So savers and investors alike are faced with a tough decision, either lose money in a savings account or consider other options.

This is where the potential to beat cash returns but with the safety net of capital protection could bridge the gap, and the UK Range 7 Deposit Plan from Societe Generale is proving to be a popular example of such an alternative option.

In a nutshell

The latest version of this recently launched plan protects your initial deposit and offers savers a fixed income of 7% each year (gross) provided the FTSE 100 (the ‘FTSE’) remains between an upper and lower range based on its level at the start of the plan.

This range increases each year and if the FTSE remains within the range during the year you receive the 7% payment, if it moves outside of the range then no income will be paid for that year.

Fixed income

Although the income is not guaranteed it is fixed which means it is either 7% or nothing, depending on the performance of the FTSE. The number of years the Index remains within the range determines the overall amount paid to you over the term of plan, which equates to the following:

Number of years income is paid
Total received
6 out of 6 years
5 out of 6 years
4 out of 6 years
3 out of 6 years
2 out of 6 years
1 out of 6 years

Compared to fixed rates

To put the above into context, our best 5 year fixed rate is currently offering 3.01% per year, which equates to 18.1% paid over the term or 20.1% compounded. On this basis, if you consider there is a possibility of the FTSE falling outside of the range on at least 4 out of the 6 years, a fixed rate would be the better option.

However, if you consider the FTSE will remain within the range for at least half of the 6 year term then you would be better off than if you had opted for a fixed rate, increasingly so the more years it stays within the range.

The ranges

The 7% income is paid provided the FTSE stays within the required range for the duration of each year. The range increases by 2.6% each year, starting at +/- 12% in year one and finishing at a range of +/-25% in the final year.

Assuming the FTSE starts at 6,181 points (today’s opening value), this would look as follows: 

Range - %
Range – points
+/- 12%
5,439 – 6,922
+/- 14.6%
5,279 – 7,083
+/- 17.2%
5,118 – 7,244
+/- 19.8%
4,957 – 7,404
+/- 22.4%
4,796 – 7,565
+/- 25%
4,636 – 7,726
     Past performance of the FTSE is not a guide to its future performance.

Depending on your view of what could happen to the FTSE in the coming years, when comparing the potential income yield to the best fixed rates currently available this plan offers the potential for an attractive upside. 

Fixed term

The UK Range 7 Deposit plan has a six year fixed term and early withdrawal could result in you getting back less than you paid in. It is therefore a medium to longer term option which is designed to be held for the full term.

The fixed term will appeal to those who wish to plan around this and combined with the potential for a fixed return, this gives a clear picture of what the coming years may yield. With many economists predicting that we may not see an interest rate rise until mid 2017, this could be seen as a viable option.

Capital protection

Since the plan is a structured deposit you will receive your initial deposit back in full after the six year term, regardless of what happens to the FTSE 100 Index and as long as the deposit taker for the plan, SG Hambros Bank, is able to repay your money.

In the event that the bank is unable to meet its liabilities, the plan would come under the remit of the Financial Services Compensation Scheme deposit protection. This means savers could be eligible for compensation from the scheme for up to £85,000 per person if SG Hambros Bank was unable to return the capital invested to savers.

Credit ratings and agencies

One of the ways of determining the credit worthiness of a deposit taker such as a bank is to look at credit ratings which are issued and regularly reviewed by independent companies known as ratings agencies. Standard & Poor’s is one of main global credit rating agencies and as at December 2012, SG Hambros Bank Limited has a credit rating of A with a stable outlook.

The ‘A’ rating denotes a strong capacity to meet financial commitments but somewhat susceptible to adverse economic conditions and changes in circumstances. The stable outlook indicates that the rating is unlikely to change in the short to medium term, i.e. in the next 6 months to 2 years.

Growth option

For those who do not require the income to be paid out, the plan also includes a growth option where any payment is kept within the plan and then the total is paid to you at the end of the term. The ranges are exactly the same as the income option but the payment is slightly higher at 7.3% (not compounded).

Fair Investment conclusion

Commenting on the UK Range 7 Deposit Plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “One of the main features to understand is that your income is not guaranteed. But the replacement of a guaranteed return with the opportunity to receive well over double the market leading fixed rate is a compelling one, especially as the recent demise of competitive rates available in the savings market looks set to continue for some time. With the build up to the end of the tax year there is a further opportunity since the plan is available as a Cash ISA and also accepts Cash ISA transfers”

This plan is available as a deposit, Cash ISA and Cash ISA transfers.

Click for more information about the SocGen UK Range 7 Deposit Plan »

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment depends on your individual circumstances and may change.

This is a structured deposit plan that is capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial 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 is not a guide to its future performance.

© Fair Investment Company Limited