With the Bank of England Base rate stuck at 0.50% the impact of a low interest environment that we have been in for some time now has really started to hit savers pockets particularly over the last 5 months. The difficult savings situation has been exacerbated by the introduction of the Government Funding for Lending Scheme which was launched in August last year to encourage lenders to lend more to the public by offering more mortgage products.
Unfortunate Side Effects
The unfortunate side effect of this is that many saving providers who are able to access money cheaply from the Government are taking their savings products off the shelves. For savers looking to tie up money in a fixed rate bond from anything from 1 year up to 5 years the current deals on offer to savers don't provide the choice that we were seeing earlier in 2012. According to Bank of England figures there was a 15% drop in savings plans on offer in the UK market between August and December last year.
With high street banks withdrawing competitive savings offerings from instant access to fixed rate bonds, many of the smaller building societies and savings providers have found themselves topping the savings tables by default. The consequence of this is that many are withdrawing from the market because they cannot meet demand.
The question all savers are asking is how long the current situation will continue. 2013 is looking like it will not be much different from 2012 and according to Ray Boulger Technical Manager at John Charcol "It looks like we are going to be in a low inflation, low interest rate environment for quite a few years".
Latest Fixed Rate Bond Deals
We highlight a selection of some of the current leading fixed rate bond deals for January 2013 and some alternative ideas if you are happy in tying up capital for 3 years or more.
1. Short term fixed rate bonds
United Bank UK are currently offering a 1 year fixed rate bond paying 2.25% Gross/AER with deposits from £2,000 and for a 2 year bond 2.35% Gross/AER. Principality Building Society are currently offering a 9 month fixed rate bond paying interest at 1.80% Gross/AER.
2. Medium term fixed rate bonds
Vanquis Bank are offering a competitive 3 year fixed rate bond is currently one of the best 3 year rates in the market at a rate of 2.76% Gross/AER with a minimum deposit of only £1,000.
3. Long term fixed rate bonds
If you are happy to tie up capital for 5 years then Vanquis Bank are paying a rate of 3.01% Gross/AER. Monthly and annual interest options. Minimum deposit of £1,000.
Click here for a selection of our best fixed rate bonds.
Alternative options to fixed rate bonds
In looking for alternative options to traditional fixed rate bonds structured deposit plans are worth a closer look.
What is a structured deposit plan?
A structured deposit plan is a fixed term investment with a payout that is linked to the performance of an underlying asset e.g. FTSE 100
Structured deposit plans are appropriate for people who have a low appetite for risk but are willing to accept a return on the deposit that involves limited exposure to the stock market. While returns are not normally guaranteed in structured deposit plans they offer the potential for competitive rates of return over fixed term bonds. When interest rates are low they can offer investors relatively low risk exposure to market performance.
In a deposit plan money is held with a deposit taker such as a high street bank. Capital is at risk if the deposit taker is unable to meet its liabilities and repay investors. As with a savings account in the event of default of the deposit taker you have recourse to the Financial Services Compensation Scheme (FSCS) which currently covers an individual up to £85,000 per authorised institution.
What plans are currently available?
3 to 4 year term plans
Investec’s 3 Year Deposit Plan offers a fixed return of 15% if the value of the FTSE at the end of the term is higher than its starting value, subject to averaging.
Cater Allen offer a 3¾ year Growth Plan which will return 100% of any rise in the FTSE 100 over the term, capped at 26% (gross). Depending on your view of the FTSE this also offers the opportunity to provide a higher return than would be available through current fixed rates of similar duration.
Early maturity plans
The ability to mature early is a feature which is unique to structured products. Investec’s Kick Out Deposit Plan offers a potential 4% per annum (not compounded) with the opportunity to mature early provided the value of the FTSE 100 at the end of each year (from year 2 onwards) is higher than its value at the start of the plan.
This means a return of 8% could be yours after just 2 years and even if the plan runs for the full 5 years and then kicks out, this deposit offers the potential for more than a 1% premium on longer term fixed rates.
If you require income , Societe Generale’s UK Range 7 Plan 6 offers the opportunity for an attractive 7% (gross) for each year the FTSE stays between an upper and lower range based on its level at the start of the plan. This range increases each year, starting at +/- 12% in year 1, and then increasing by +/- 2.6% thereby providing a wider range each year within which the FTSE can move. If it moves outside the range, the income is not paid for that year. The plan has a 6 year term.
Since the returns are not guaranteed, these savings plan alternatives are not designed to meet the entire needs of every saver. However what they do is provide a defined return over a defined term compared to other savings options currently available.
As with any savings product, there is always a trade off for receiving a higher rate of return and with structured deposits, this is made absolutely clear at the outset. The two main downsides are that the deposit taker may go into liquidation (as with any deposit) and that the payout mechanism within the plan does not occur so you only receive your capital back.
This has to be balanced and compared to the upside which is inevitably a greater return than could be achieved by putting you money away for the same length of time with a similarly rated credit institution.
For a range of current structured deposit plans see the table below.