The pressure on savers to maximise the returns from their capital is arguably greater than ever before, but despite inflation being at rock bottom, the current market for instant access and fixed rate bonds rarely offers us anything to shout about. We therefore take a look at a selection of opportunities that are being considered by savers looking for the potential to enhance their returns, all of which are available both in and outside of an ISA.
Savings rates, dire straits
The mainstay of many a saver’s portfolio has historically been the fixed rate bond. However, rates here still remain at historically low levels as banks have been able to secure cheap funding by alternative means which has resulted in an increasing number of savers shoring up reserves in instant access accounts. But with leading deals only offering around 1.25% AER variable, there is little prospect of growth on your capital over and above the cost of living. And with longer term fixed rates only offering around 3.0% AER, long gone are the days where committing your money for longer was all you needed to secure a competitive rate.
Alternatives bridging the gap?
The implications of the current savings rates on offer need to be taken very seriously since it calls into question the traditional thinking behind many saver’s decisions. Also gone are the days when it was enough to keep a relatively small amount in instant access and then simply roll your fixed rate bond into the prevailing rate available at maturity.
Although fixed rate bonds should continue to play an important part in the savings jigsaw, their status as being the only option for money we do not need immediately should be carefully reviewed, especially in the context of the historically low rates on offer. So what alternatives are being considered?
Where to start
Not only must we ask ourselves what it is exactly that we are buying when committing our capital to a fixed rate bond, we should also be considering what alternatives are available since the current market for savers inevitably leads us to a tough decision – either accept record low returns from our savings accounts, or take on more risk.
However, this does not necessarily mean that all of our capital needs to be exposed to risk since there are a wide range of alternatives to consider with varying levels of risk and saver’s capital can be split across a number of options. Therefore, perhaps the most important consideration and one which should be addressed first is whether you wish to expose any of your capital to risk or whether a return of at least your original deposit is your top priority.
Ability to mature early
If capital protection of your initial deposit is a priority there are a number of viable alternatives to fixed rate bonds and as with other deposit based products, all of these plans are capital protected and eligible for FSCS protection. For those prepared to tie in for the longer term but who would also like the opportunity for their plan to mature early, the Kick Out Deposit Plan from Investec offers the potential to mature from year 3 onwards. Provided the value of the FTSE 100 Index at the end of years 3, 4 or 5 is higher than its value at the start of the plan (subject to averaging), even by just one point, then the plan will mature early and provide a return of 4.25% for each year (not compounded) – that’s a potential 12.75% in just 3 years. If the Index is lower on all of these dates, you will only receive a return of your initial deposit at the end of the six year term.
Fair Investment view: “With leading fixed rate bonds only offering around 2.45% over three years and 3% if you fix for five years, the combination of capital protection and the potential for a higher rate offered by this deposit could be an option for those who are frustrated with low savings rates. However, if the Index is lower on all of these dates, you will only receive a return of your initial deposit.” Click here for more information about the Investec Kick Out Deposit Plan »
Longer term
The Investec 6 Year Deposit Plan offers a potential 35.95% fixed return at the end of the six year term provided the FTSE 100 Index at the end of the term is higher than its value at the start of the plan (subject to averaging). This can be by any amount, so even if the FTSE is only 1 point higher than its starting value, you will receive your capital back plus a 35.95% return. If the Index is lower, you will only get your initial capital back. As with other deposits your capital is also eligible for FSCS protection.
Fair Investment view: “If the plan does provide the fixed return, it is equivalent to around 5.25% per year (compound), which is considerably higher than other deposit based options however, by linking your return to the stock market, it is not guaranteed as it would be with a fixed rate bond.” Click here for more information about the Investec 6 Year Deposit Plan »
Click here to compare fixed rate bond alternatives »
Higher fixed returns
The need for income is one of the most consistent demands put on our capital and for those prepared to put their capital at risk in order to provide a higher fixed income the Enhanced Income Plan from Investec offers 5.16% fixed each year, paid to you regardless of the performance of the stock market. This is paid in monthly installments of 0.43%.
The trade off for a fixed income which is significantly higher than those available from fixed rate bonds is that your capital is at risk. This investment contains what is known as conditional capital protection which means that your initial investment will be returned in full unless the FTSE 100 Index falls by more than 50% during the investment term. If it does, and the Index also finishes below its starting level then your original capital will be reduced by 1% for each 1% fall. Therefore, this plan should only be considered if you are prepared to lose some or all of your capital.
Fair Investment conclusion
Commenting on the investment, head of savings and investments at Fair Investment Company, Oliver Roylance-Smith, said: “The high level of fixed income and the monthly payment frequency are attractive features of the Investec Enhanced Income Plan and with savings rates continuing at historically low levels there is clearly pressure on savers to think long and hard about what to do with their money.”
He continued: “Unlike savings plans, investing puts your capital at risk and so you should only consider this investment is you are prepared to lose some or all of your initial capital. However, should you consider the need to move some of your capital into an investment or are considering additional investments or ISA transfers, this plan could be a compelling opportunity to provide a high level of fixed income while offering your initial capital some protection against a falling market”.
Click here for further information on the Investec Enhanced Income Plan »
ISA transfer option
For those who are looking to make the most of their ISA allowance this is an important area. For basic rate tax payers, utilising this annual allowance increases the amount of any interest paid by 25% whilst for higher rate tax payers this increases to 66% so is not to be ignored. Those looking for transfer options for their existing ISAs or to make sure they use their ISA allowance of £15,240 must do so by the 5th April 2016.
Transferring your ISA can be done without the loss of your ISA wrapper and it will not affect your annual ISA allowance for the current tax year. However, if you are considering this option you should be aware that Investment ISAs such as the Investec Enhanced Income Plan do put your capital at risk.
Please note that the tax treatment of ISAs depends on your individual circumstances and may be subject to change in the future.
Compare alternatives to fixed rate bonds »
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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.
Although structured deposit plans 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. Returns are not guaranteed. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.
Unlike instant access accounts and fixed rate bonds, returns from structured deposit plans are not guaranteed.
Tax treatment depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.
The Investec Enhanced Income Plan is a structured investment plan that is not capital protected and there may be the risk of losing some or all of your initial investment. There is also 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 which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term.
