For over a decade, savers received nominal rates of return, if any at all, and we witnessed bonds and annuities diminish in value and arguably disappear from the suite of savings, investments, and pensions options. The other side of this equation was the increased demand for equities and the availability of capital – look at the boom in house prices as an example of this –, but this balance begun to readdress in December 2021 when the base rate of interest begun its journey of 13 consecutive rises. The rate is now (as at 11.7.23) sat at 5%, with further lifts forecast.
This has translated into a host of attractive savings options and a ‘call to action’ for those that endure the high-street bank’s measly returns [and profiteering].
Premium Bonds have long been one of the nation’s most popular savings mechanisms; offering capital preservation and potential returns. The treasury backing has the additional benefit of protecting the entire sum invested, regardless of value, rather than the £85,000 cap that is covered by the Financial Services Compensation Scheme (FSCS) for entity failure.
The returns have increased to 4 per cent from next month, on average, but are subject to the monthly draw. Essentially each bond holder enters a free lottery each month with the prospect of winning between £25 and £1m – the odds for winning are c. 22,000 / 1 but “it could be you!”
The high-street banks and building societies are often slow to react to rate changes due to the price inelastic demand of their client base; they assume that their customers won’t research and switch accounts due to the admin burden. And they’re correct of course, when did you last switch bank or building society?
This does mean that vast swathes of the population are not making the most of their money and are disproportionately exposed to the escalating costs of living - £1 today is worth more than £1 tomorrow.
This is where shopping around, particularly online, can assist savers greatly. Opening a new account can be quick and easy, and rates more attractive – for instance, Principality Building Society hosts an easy access account (with a maximum of two withdrawals per annum) which pays 4.45% and the “Tandem” instant access account, with no minimum deposit, can offer 4.36%. Supermarket banks and niche investment banks can also offer improved savings rates over the household names of the high-street.
‘Term Deposits’ are fixed term savings products which produce a defined rate over a specific term, typically 1, 2 or 3 years. They are generally provided by investment banks and available direct, through platform or via your financial adviser.
The preferred investment platform at SW Law is Transact due to the transparency, ease of admin and wide access to investments that it can provide. As at 12th July, the Term Deposits offered by this service are:
• 6.3% for monies ‘locked away’ for 3-years
• 6.1% for monies placed for a 2-year period
• 5.9% for 1-year deposits.
I mentioned at the opening of this article that bonds had also increased their return profile with UK 10-year bond yields now over 4.5% and corporate bond yields exceeding 5.5%.
If you bear in mind the compounded effect of returns [and of inflation!] these small tweaks can make a significant difference to your wealth position and related financial plan. Consider the ‘Rule of 72’ – a simplified formula that estimates how long your investment will take to double in value… At 2% it takes 36 years (72/2), and at the 6% available from ‘Term Deposit’ it takes c. 11.4 years (72/6.3).
Of course, opportunity cost exists and the prospects for recovery and/or growth of other assets (e.g. equities, property and infrastructure) over the medium to long term are strong, so an individual’s attitude to risk and time horizon will be a key consideration.
Diversification is a key tool for an investor, so a mix of the aforementioned may increase long-term returns and/or reduce risk.
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