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Fair Investment Company
We're here to help you get a fairer deal for your money.
We're here to help you get a fairer deal for your money.

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The savings outlook for fixed rate bonds in 2013
17 January 2013 / by James Caldwell

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. 

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.
Income plans

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.

Please note:

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.

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Latest News from +Oliver Roylance-Smith - "High Fixed Income For These Challenging Times"  

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The FTSE Defensive Bonus Plan from Morgan Stanley is proving particularly popular with both existing customers and new investors - Read our latest post to find out why! 

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Discover a range of investment ideas from the banking and fund industries. Whether you are looking for high returning income plans or different growth investments, our options available will give you a range of options! 

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Have you seen our latest range of savings accounts to help you beat low interest rates?  

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Is inflation really under control?
27 June 2012 / by Oliver Roylance-Smith
With the reductions to the headline rate of inflation in recent months, you might start to feel like things are starting to come under control.  Here we take a look at some of the main factors which have driven the recent falls and look further as to what this could mean for both savers and investors in the medium to longer term.

Moving in the right direction
Last week the Office for National Statistics revealed that the annual headline inflation rate decreased in May as the Consumer Price Index (CPI) fell to 2.8% from 3%. The Retail Price Index (RPI) also fell from 3.5% to 3.1%. The biggest downward pressure for these latest figures was fuelled by a drop in petrol prices as well as in the food and non-alcoholic beverages sector.
The latest results mark a second consecutive fall in inflation with CPI at its lowest level since November 2009. At face value this is good news and certainly gives a feeling of things moving in the right direction.
Further quantitative easing likely
However, the news is not all good. Since this rate is getting closer to the Bank of England’s target rate of inflation, the potential for further quantitative easing (QE) may be on the horizon, with economists stating this gives the Bank of England room to restart QE as early as next month.
Investec UK economist Philip Shaw told the Telegraph: "With inflation coming down sharply over the past couple of months, the economic data disappointing and global uncertainties rising, there doesn't appear to be much cause to hold back."

Impact on savers?
Combined with the previous week’s announcement of £140 billion of cut-price loans from the government, this is potentially a double blow for savers since banks may have less pressure to entice savers with higher rates. Savings rates are already at extremely low levels relative to previous years, particularly fixed rates which have noticeably tumbled in recent years.
With there being a very real possibility that the base rate could be cut further to 0.25% by the end of the year, the situation is perhaps not as simple as inflation finally coming under control. The ultra-low interest rates and money printing in the form of QE have not produced the growth envisaged, but rather three years of continued alterations to future growth forecasts, normally downward.
The golden days of high interest rates is not only well and truly behind us, but is nowhere near looking like returning in the coming years and it seems the only ones to benefit from the government’s ongoing fiscal policy are the banks themselves.

Bank ratings lowered
And yet despite this, on Friday last week Moody’s, one of the three largest credit ratings agencies, downgraded 15 global banks and financial institutions, including RBS, Barclays, HSBC and Lloyds in the UK. This is as a direct result of the eurozone crisis and fears that this will prompt another credit crunch by making banks afraid of lending to each other, let alone to anyone else.
This followed a cut to Santander UK’s rating last month and although these downgrades were expected and should create little in terms of too much immediate concern from savers, it does all add to the overall negative feel of the future economic outlook and the uncertainty around inflation.

So what will happen to inflation?
What is evident from the above is that to focus in isolation on the recent falls in the headline rate of inflation, from its peak of 5.2% in September 2011 to its latest level of ‘just’ 2.8%, is far too simplistic and could lead us into a false sense of reassurance.
Remember that this is only the current rate of inflation and that the factors which contribute to the headline rate going forward are complex and varied. This means that what might happen in the future is nowhere near settled or guaranteed and so the only way to plan for the future is to look in more detail at the main factors that create inflationary pressures.

Commodity prices
One of the catalysts for the recent reduction is that the sharp increase in commodity prices seen at the end of 2010 and during 2011 has since reversed and the latest decrease reflects this, with a main contributing factor being the reduction in the price of motor fuel.
However, although the current economic environment is not supportive of commodity prices in the short term, the political will to foster a return to economic growth will create upwards pressure on commodity prices, which is likely to feed through to higher inflation. Not only is this highly likely to occur, but this could also happen very quickly and without much notice.

Money flow and reaching the broader economy
Another critical factor is that although the UK government, via the Bank of England, has flooded the financial system with easy money via QE unfortunately little of this has reached the broader economy and so again, the only ones to seemingly benefit thus far have been the banks. What is clear is that for a long lasting return to solid economic growth this liquidity needs to find its way into the hands of the consumer and businesses.
This was in no small part the reason for the announcement from the government last week to implement the £100 billion ‘Funding for Lending’ scheme. These loans are being made available on the condition that banks increase their lending to businesses and households, something which the government had hoped would have happened already. What has not been commented on is that once these measures gain traction and money does eventually feed through more quickly to the wider economy this is also likely to force inflation to rise.
Reduction of government debt
One final aspect of the current crisis that also points to an increase in inflation is the need to consider the sheer volume of debt which is owed by the UK government and the budget deficit this creates which still equates to around 8% of GDP.
The future value of outstanding debt is directly affected by both time and, critically, inflation. As an example, after 10 years of inflation at a rate of 3%, the future value of debt would stand at 75% of its current value. It is therefore an easy method for the UK government to reduce their debt burden by allowing inflation to increase.

The combination of these factors suggests the potential for inflation to increase significantly over current forecast levels in the medium term. In recent years, Bank of England inflation forecasts have been worryingly loose and inaccurate and perhaps now we can start to understand why.
As savers and investors, the recent falls and current headline rate of inflation must not be taken at face value when making decisions that tie up your money for any period of time. The return of the UK to solid growth is not a simple one and inflation is inextricably linked to the way forward.
Exactly what shape this will take is unclear but with so many indicators pointing to an increase, potentially by some margin, we must understand what this could mean for our savings and investments. Having an eye on what could happen before acting could be a wise move and the impact of ignoring this could be very costly indeed.
No news, feature article or comment should be seen as a personal recommendation to invest.
© Fair Investment Company Limited

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Fixed rate bonds - latest savings deals
15 June 2012 / by James Caldwell

In our current low interest environment in the UK, maximising the interest on your savings requires a proactive approach as many savings providers offer poor value on their savings accounts. Fixed rate bonds offer savers who are happy to tie up capital for a set period the chance to earn more - below is a selection of fixed rate bond deals for June 2012.
1 year fixed rate bonds
United National Bank are currently offering a 1 year fixed rate bond paying 3.45% Gross/AER with deposits from £2,000.  Post Office savings accounts, provided by Bank of Ireland (UK), are offering a 1 year fixed rate online account for deposits of £500 or more at 3.27% Gross/AER.
2 year fixed rate bonds
The Birmingham Midshires 2 year fixed rate bond is currently market leading at a rate of 3.75% Gross/AER with a minimum deposit of only £1. The Post Office are also offering a competitive deal on their 2 year fixed rate bond at 3.63% Gross/AER.
3 year fixed rate bonds
For a 3 year term, Birmingham Midshires also have a market leading rate of 4% Gross/AER for deposits from £1. Withdrawals are permitted subject to a loss of interest. Halifax savings accounts include the 3 year fixed online saver which offers 3.85% Gross/AER for deposits from £500. Halifax are at the time of writing offering savers a chance to win £100,000 in their prize draw. 
4 year fixed rate bonds
Halifax are currently offering a market leading rate on their 4 year fixed rate bond at 4.05% Gross/AER with deposits from £500. No additional deposits can be made on this account and withdrawals are not permitted.
5 year fixed rate bonds
If you are happy to tie up capital for 5 years then Halifax are paying an attractive bond rate of 4.15% Gross/AER. Withdrawals are not allowed. Vanquis Bank are paying 4.06% Gross/AER on their 5 year fixed term deposit account with annual, quarterly and monthly interest options. Minimum deposit of £1,000.
Fixed rate bond alternatives
If you are prepared to tie your money up, there are alternatives to fixed rate bonds known as structured deposit plans which typically have a 3 to 6 year term. These plans are cash based, but they provide the potential of stock market linked returns while protecting your initial deposit. As with fixed rate bonds, these plans are eligible for the Financial Services Compensation Scheme (FSCS) up to £85,000 per person per institution in the event that the deposit taker defaults.
3 Year Deposit Plan
The Investec FTSE 3 Year deposit Plan currently has a target return of 17% on maturity, as long as the FTSE 100 final index level is higher at the end of the term than the initial index level at the start date. If at maturity the final index level is equal or lower you will not recieve the investment return but your original capital will be repaid.
More fixed rate bond alternatives.
* Data accurate as at 15/06/2012.

No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment you should seek independent financial advice.
© Fair Investment Company Ltd
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