What are the alternatives for savers?
Q. I have been extremely disappointed over the years with the amount of interest received on savings. In the past we were encouraged to take out TESSAs and ISAs as they were tax-free investments but, since the recession sent interest rates plummeting, the interest is, on average, a measly 0.25-0.5 per cent. It seems the only way to get any reasonable amount of interest is to tie your money up for years with it not being accessible. Is this really fair for savers and are there any alternatives?
A. I do have sympathy for savers because historically interest rates are lower than they have ever been. The Bank of England base rate is at just 0.5 per cent, when just two years ago rates were at 5.25 per cent. Rates are widely expected to remain low for the next 12-18 months, but with ISAs it is wise to take a longer term view as rates will go higher in the coming years.
If you shop around there are better ISA rates available than those you have mentioned, but like you have said, some of these require you to leave your money in for a fixed period, which is no good for those savers who use their interest to supplement their income. The other thing you may consider is to put your money in an ordinary deposit account as some of these are offering over 3 per cent interest at the moment, better than many ISAs.
Since interest rates fell, we’ve had more enquiries from historically cautious investors who were satisfied with their returns when rates were at over 5 per cent, but are now saying their savings are not generating enough to supplement their income. The good news is there are alternative medium-to-low risk products that can generate a better return. These include Equity Income Unit Trust and Corporate Bond Unit Trust, both of which are yielding over 4 per cent net of basic rate tax.
Another alternative is so-called Structured Products. The attraction here is that some of these come with a capital guarantee which means you can’t lose any of your investment. The return depends on the performance of the financial markets. For example, you might invest your money for three years in a product that guarantees a return if the value of the FTSE 100 is higher after that period than when you took the investment out. So if the FTSE 100 was at 5,300 when you made the investment and after three years it was at 5,301 or higher you would get the return. These products are currently generating yields of between 6 and 7 per cent. If the FTSE 100 was lower than when you took out the investment, you would simply get your money back in full.
A qualified financial advisor will be able to give you more information on savings products and which of these products is likely to be better for your circumstances.