The savings dilemma and the rise of alternatives

The savings dilemma and the rise of alternatives

01 May 2012 / by Oliver Roylance-Smith

The economic landscape continues to create a real dilemma for savings and put a spotlight on the fixed rate bond. With yields on these lowering amid continued pressures on getting the most out of your savings, we take a look at what is driving the demand for fixed rate bond alternatives and what the current market has to offer.

Economic latest

The last month has seen a continuation of the all too familiar backdrop of economic uncertainty. The record low Bank of England interest rate remained at 0.5% well into its third year, inflation crept up to an uncomfortable level and the UK fell back into recession – it doesn’t take too long to get the picture.

The days of continued recovery certainly appear off the radar for the foreseeable future, but what about those who are in need of a decent return from their hard earned savings – what is the market offering?

Fixed rate bonds under pressure

The mainstay of many a saver’s portfolio has historically been the fixed rate bond. However, the news here is not much better. Fixed rate bonds have been under continued pressure and this has taken hold of the market which has reacted by offering generally lower yields.

Less than 1% separates the difference in rates available between 1 year fixed rate bonds (3.5% from Tesco Bank’s 1 year fixed rate saver) and 5 year fixed rate bonds (4.41% from the Vanquis Bank 5 year fixed rate bond). This suggests that the uncertainty around what the future holds is felt by all concerned and there is simply no appetite to offer attractive rates for savers at the moment.

The rise of the alternatives

With the combination of challenging economic conditions and poor fixed rates, it is easy to understand why the opportunity to generate higher returns is a compelling one. The need for every saver in the UK to generate competitive returns, ideally over and above inflation, has not been diminished, indeed it is now greater than ever.

Fixed rate bond alternatives have flourished in this environment by combining protection of your capital with the opportunity to achieve potentially higher returns that would be available from a fixed rate bond of similar duration.

Bridging the gap

These plans are normally dependent on the future performance of an Index, commonly the FTSE 100. The main downside therefore is that the future performance may result in the plan not paying out any income or growth, either for that year or at all. The upside is the opportunity for high returns which also have the potential to beat inflation, an achievement not commonly associated with capital protection.

The plans can provide income or growth and generally range in duration between 3 and 6 years. 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

Although this is a relatively new market, there are a number of active providers and a wide range of plans to choose from which cater for different scenarios.

These plans normally have a fixed period within which you can apply and once that deadline has passed, a new version of the plan will be launched, helping to provide a continuous stream of competitive offerings.

Income

For those looking for income, Fair Investment’s Income Deposit Plan offers the opportunity for an attractive return (this has ranged between 7% and 8%) for each year the FTSE stays within an upper and lower barrier. The lowest barrier has been 4,250 and the highest barrier has been 7,500.

The return is therefore dependent on the future performance of the FTSE and if it falls outside of these barriers, no income will be paid for that year, but you still have the opportunity to receive income for each remaining year. The deposit taker is the Royal Bank of Scotland and there is a quarterly income option available. Find out more here »

Short term

In the shorter term, Investec Bank’s 3 Year Deposit Plan offers a fixed return of 17.5% if the FTSE 100 finishes higher at the end of the term than it’s starting value. This was the most popular alternative to fixed rate bonds during the recent ISA season and when compared to the returns on offer from leading three year fixed rates (currently around 4%) it is clear that savers are beginning to consider the potential upside is a viable option. Find out more here »

Early maturity

The ability to mature early is a feature which is unique to these type of plans. Investec’s Kick Out Deposit provides a potential return of 6.0% per annum for each year the plan has been in force and will mature early (after year 2) provided the FTSE 100 finishes higher at the end of the year than the starting value of the plan. Find out more here »

For higher returns, Gilliat’s Deposit Kick Out provides potential growth of 8.1% per annum, with the opportunity to mature early each year dependent on the performance of five FTSE 100 shares rather than the Index itself. Both of these plans have 5 year terms. Find out more here »

FTSE on the rise?

For those who consider the FTSE will rise in the future then there are several plans which offer the ability to capture those returns. Legal & General’s 6 Year Growth Deposit Plan will return any rise in the FTSE, capped at 50%, whilst Cater Allen’s Enhanced Growth Plan offers to return four times any growth in the FTSE, capped at 40%.

A growing market

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 and comparable peace of mind regarding capital protection. With an increase in the number of providers offering these plans, they provide an attractive range of viable options when considering how best to spread your savings.

Compare fixed rate bond alternatives »

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.

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.


© Fair Investment Company Limited