Running scared of banks? There are other ways to save your money safely
Saturday 29 September 2007
After witnessing the first run on a bank in more than a century two weeks ago, thousands of savers – not just customers of Northern Rock – began looking for a new home for their cash deposits. Although cash savings accounts have always been considered the safest place to keep your money, the Northern Rock crisis highlighted that deposits are not as safe as you might think in the event that a bank goes bust.
The Financial Services Compensation Scheme currently only guarantees the first £2,000 of any deposits should a bank go to the wall, and 90 per cent of the next £33,000. Other types of investments – such as mutual funds and investment bonds – enjoy much better levels of protection.
For the moment, the Government has indicated that it is prepared to underwrite the entire UK banking system – to ensure no bank is allowed to become insolvent. However, for those who have been sufficiently spooked by the Northern Rock crisis, there are several other low-risk havens for your money worth considering.
National Savings & Investments
The Government-backed savings provider – NS&I – offers a range of different products, which not only come with the added security of the Treasury's permanent support (unlike the current temporary promise to the UK's banks), but which are also, in many cases, tax-free.
Its index-linked savings certificates, for example, currently pay 1.35 per cent above inflation, and all returns are free of tax. Inflation is measured using the Retail Prices Index (RPI), which is currently running at an annual rate of 4.1 per cent – hence savers in the index-linked certificates will get a rate of 5.45 per cent a year. Matthew Woodbridge of Chelsea Financial Services, the independent financial advisers, says that for higher-rate taxpayers, this is the equivalent of earning 7.27 per cent before tax, and 6.8 per cent if you're a basic-rate taxpayer.
You're not allowed to invest more than £15,000 per issue (of which there are usually a handful every year) in these products, and the major downside is that you have to keep your money tied up for a minimum of three years.
Anna Bowes of AWD Chase de Vere, another firm of financial advisers, says ultimately investors should always try to have some money that they can get their hands on instantly – in case of an emergency – and cash accounts remain the best place to get a good return and instant access. However, for those that are uncomfortable putting their faith in a private bank, she points out that NS&I also offer one of the most competitive cash ISAs, paying at annual interest rate of 6.31 per cent.
Another tax-free option with NS&I is premium bonds. You can invest up to £30,000 in these, and your capital is guaranteed. However, Woodbridge points out that returns are unreliable – as you are effectively entering a prize draw each month, to determine how much you receive. If you're incredibly lucky, you could win £1m. However, average returns are less than 4 per cent – which at current levels of inflation means you would be losing money in real terms.
Other NS&I products include fixed rate savings certificates and guaranteed income bonds. For more information, visit the website at www.nsandi.com.
Investment bonds and structured products
Another alternative to cash is to put your money in a guaranteed bond, offered by the likes of AIG, Pinnacle and Countrywide Assurance. These currently offer net interest of around 4.7 per cent for a one-year bond – although you can't get your hands on your money before maturity without paying a penalty. Woodbridge says that one key advantage of guaranteed bonds over deposit accounts is that they are covered by a different compensation scheme.
"One hundred per cent of the first £2,000 is guaranteed if the bond provider went bust, and then 90 per cent of everything else," he says. "If your money's in a bank, however, you can only get back a maximum of £31,700."
Returns from guaranteed bonds are also free of basic-rate tax – and bonds are typically available over terms of between one and five years.
Structured products provide a slightly spicier alternative for people who don't want to risk their capital, but are willing to take a bit more risk to achieve higher returns. These tend to offer you a percentage of returns achieved by a certain index. For example, Alliance & Leicester is offering a six-year product that pays you 8 per cent on half of your investment, and 50 per cent of the returns in the FTSE 100 over the next six years on the other half. Barclays Stockbrokers also offers a number of these products. For example, its FTSE 100 Capital Protected Investment note 2 will pay you 140 per cent of the growth in the FTSE 100 over the next six years. To find more of these products, talk to a financial adviser.
Money market and gilt funds
The Financial Services Compensation Scheme reserves its best protection for fund managers – guaranteeing 100 per cent of the first £30,000 if your investment manager goes bust, and 90 per cent of the next £20,000.
Amongst the lowest-risk products available from these providers are money market funds, which invest in the highest quality notes issued by banks and other financial institutions, and which usually provide a return slightly below the cash savings accounts – once the fund manager's charges have been taken into account.
"Savers who opt for a money market fund have effectively hired an expert investor to seek out constantly the best interest rates in the market on their behalf," says Richard Wastcoat, the UK managing director of Fidelity International. "And what you see is what you get: there are no introductory rates and no lock-ins.
"These funds spread a saver's money across highly liquid cash-like securities issued by a wide range of financial institutions and top companies and so provide some protection from the collapse or closure of a single financial house."
Gilt funds – which invest in government bonds – are also very low risk. But again, returns are likely to be much less than you would achieve in a savings account. One advantage, however, is that you can withdraw your money relatively quickly if you need to get your hands on it.
To find a financial adviser in your area, visit www.unbiased.co.uk or call 0800 085 3250
Can you bank on gold?
There may seem nothing less risky than owning a bar of gold – as ultimately it is the asset that our entire currency system is based on. The promise on your bank note to pay you £10, is a promise to pay you 10 pounds of gold (or was when our currency was first invented).
However, Duncan McKillop of Cobalt Capital, the financial advisers, warns that gold is not as low risk as people might think. "I certainly wouldn't call gold low risk – it's very volatile."
The price of gold soared to a 28-year high of $739 an ounce last week. But just as its price has soared in recent years, it has the capacity to fall too. However, Evy Hambro, who manages the MLIIF World Gold & Mining fund at BlackRock, believes the outlook for gold is positive over the next year.
"Dollar weakness plus a large chunk of uncertainty in the financial markets have helped to push gold towards the top of its trading range," he says. "With production from the world's gold mines declining and emerging markets demand for jewellery strengthening we expect that market fundamentals will remain favourable for the balance of this year and into 2008."
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