News Archive - December 2011
Risk free returns?
14/12/2011
Returns on cash investments are still at a historical low, with no prospect of a rise in the Bank of England base rate for the next 12 months or so.
Even if you tie up your savings for 5 years, the best fixed term accounts still only return 4.65% per annum before tax.
There are however some alternative products promising better returns. One current issue offers 7% per annum gross over a 7 year term. These products are called ‘retail bonds’ and have some very important differences to a standard savings account.
With a retail bond, you are lending money to one company over a fixed term. They promise to pay a set rate of interest over the term of the bond, and then to return your capital at maturity.
However, this type of product is NOT covered by the Financial Services Compensation Scheme. This means that if the issuing company gets into financial difficulties and cannot afford to meet its obligations, there is no protection for your interest payments or your original deposit and they could potentially be lost. Because of this, it is very important to consider the financial strength of the issuing company. These products also tend to have a long timescale (7 or 8 years), and early encashment could result in a considerable penalty.
Bond issues by National Grid and Tesco Bank this year have been popular. They do offer better potential returns than cash, but you need to be aware that higher returns always mean more risk, and that there is the potential for capital loss with this type of bond. The last few years have shown that even very large companies can get into financial difficulties.
If you invest in corporate debt via a unitised fund, like the M & G Corporate Bond fund, you get the benefit of spreading the risk of default over many different companies.
Call Mulberry Financial if you want to discuss your savings options.