Banks, building societies, insurers and investment companies offer a range of products where there is no risk to your capital. In some cases you will earn a fixed rate of interest for a set period of time, with others the rate of return is variable.
These savings schemes are ideal for the cautious who do not want to take any risk with their money. They can also appeal to those who think share prices could be about to fall and so want to sell up now, put their money in a safe home and then re-enter the stock market later, buying back shares at the lower prices.
Risk-free savings products are ideal for your emergency money. Similarly, if you are saving for something like a child's education, or to pay for your wedding or a house deposit, you may not want to take any risks with your money.
Banks and building societies offer all sorts of deposit accounts, Tessas (tax-exempt savings schemes) and bonds. Typically, deposit accounts that are operated through the post or that require a period of notice before you can withdraw your cash, will pay higher rates of interest than those offering instant access. The top paying accounts are offering around 6.5 to 7 per cent a year now.
If you are prepared to tie your money up for five years, you should consider a Tessa. You can save up to pounds 9,000 in total in a Tessa. At the end of the five year term, all interest earned on the account is tax-free.
All sorts of interest-bearing bonds are also on offer. They require a lump sum investment, usually of at least pounds 1,000, for a set period of time, usually for one year or longer. Some bonds pay a variable rate of interest, others offer a fixed rate. If you think interest rates are likely to fall over the term of the bond, then locking into a fixed rate bond can be a good deal. If interest rates rise during the term of the bond, then the rate you locked into will look less attractive later on.
A few companies offer guaranteed stock market bonds. With these, your capital is normally secure but the rate of interest you receive is based on the performance of the stock market. In some cases you are guaranteed a minimum amount of interest. In others your return is entirely linked to the performance of one or more stock market indices. You need to read the small print carefully with these bonds to see what sort of return you could get. Currently, guaranteed stock market bonds are on offer from Birmingham Midshires and Britannia building societies, Bristol & West, the former society, and Lloyds, NatWest and TSB banks.
Insurance companies, often the less well-known, such as AIG Life, GE Financial Assurance and Scottish Friendly, also offer bonds where a set amount of income or growth is guaranteed. More well-known names include Woolwich Life and Abbey Life. Like fixed-rate bonds offered by the banks and building societies, the amount of interest or growth they offer is decided at the outset so you know what to expect.