SAVINGS

 

In this article we examine the increasing complexity of saving with deposit accounts and provide you with a checklist of things you need to consider to secure the best deals. We also compare the advantages and disadvantages of gilts with deposit accounts, as savers are beginning to realise that gilts are simpler and can be more beneficial than cash.

With savings rates so low and concerns about the security of our cash so high, the business of managing our money gets ever more complicated.

For those with large amounts of cash the problems are multiplied because the Financial Services Compensation Scheme (FSCS) has a protection ceiling of £50,000 and banks regulated outside the UK have different limits and schemes.

The other complication is that where banks or building societies are part of a group, like HBOS, the member companies can be registered as either a single or separate entity. This matters because if you deposit the £50,000 protected maximum in each of five banks in the same group that are registered as a single entity only £50,000 is protected. If they are separately registered, however, the figure is five times higher. And, with increasing mergers and acquisitions activity caused by failing savings providers it is difficult to know who owns who.

Keeping abreast of all the different rules and industry changes is a small part of what you need know in order to make the most your savings - as you will see from our checklist below:

SAVERS CHECKLIST FOR DEPOSIT ACCOUNTS

 

 Draw up a ‘top rates’ provider shortlist...

Use internet search engines and/or national press ‘best buy’ tables to make up a shortlist of top providers - the number of whom - should be in direct proportion to the amount you wish to save. As a guide allocate one provider for every £40,000 so that when the interest is added you are unlikely to exceed the £50k protection limit. If, for example, you have £200,000 to place, your shortlist should contain at least five providers. Remove from your shortlist those firms who you perceive to be risky. If what they are offering looks too good to be true it probably is.

If Northern Rock has the best rate of all you will not need to spread your cash because this nationalised bank offers unlimited protection for the time being. With National Savings & Investments there is a limit to the amount you can deposit in individual accounts and in total.

NB: Research from Sainsbury's Finance reveals that only 3.8% of easy access savings accounts now offer a rate of 3% or more on balances of £5,000 plus . That's just 14 of the 367 instant access accounts in the market.

 

Beware of Post Office accounts and the Irish banks...

Savers with the Bank of Ireland, who run the UK Post Office accounts, are not protected by the UK Financial Services Compensation Scheme. They are forced to rely on a scheme underwritten by the Irish government which has no money set aside if one of their banks goes bust. Given the acute problems with the Irish economy, savers who are tempted by the attractive rates offered by the Post Office, Bank of Ireland and Anglo Irish Bank put themselves at much greater risk than with UK protected banks.

 

Draw up a ‘most consistent’ shortlist...

Be aware that the top rate is not always the best rate over time because many deposit takers haul you in with an attractive rate then lower it later when their business targets are met. So unless you plan to be a ‘rate tart’ you need to identify those providers who consistently pay competitive rates.

 

Check out the rate type...

Is it a variable, fixed or tracker rate? Variable rates can be changed at the provider’s discretion, and, as many people are discovering, there is usually no contractual obligation to pay interest. Fixed rates are usually good value when interest rates are falling. Tracker rates are best when bank base rates are rising.

 

Watch out for temporary bonuses...

One way providers woo savers is to apply a temporary bonus, which when removed, can make their rate uncompetitive. If you opt for one of these you should diarise that date the temporary bonus ends and switch to a better rate when it does.

 

Check how the account is operated...

Is the account branch based, internet only, a postal or telephone account or a multiple of these? Many people miss out on the best rates because they do not know how to use the internet and/or have access to it.

 

Check access restrictions and early withdrawal penalties...

The best and simplest accounts are ‘easy access.’ With these accounts you can usually withdraw all your cash within ten working days without penalty. With restricted access accounts you trade higher interest for less access which means that you must give a period of notice to withdraw your money or suffer loss of interest. The greater the restrictions the more you usually make. Be careful not to tie up all your money as you may need some of it in an emergency. The general rule is to keep at least three months outgoings as a contingency fund in an easy access account.

 

Watch out for ‘tiered’ interest rates that exceed the ‘protected’ limit...

This matters because if the only good rate is for a deposit on or above the protected limit you could lose every pound above it if the provider goes down. Northern Rock and National Savings & Investments have an unlimited guarantee but that is subject to any credit balance maximums that may apply to their different accounts.

 

Check for any age restrictions...

If the account pays preferential rates to people under or over a certain age you may not qualify.

 

Check the minimum and maximum account balance.

 

Check how much compensation you will get if the provider goes bust..

For savings institutions regulated by the United Kingdom Financial Services Authority the maximum is £50,000. For others it may be less or nothing. This is a very important point because since the credit crunch began many big banks have failed and the prospects for those that remain are not looking good. If you are considering putting some or all of your money in a foreign bank you will need to make a judgement about the chances of getting your money back if it fails - even though it may have a compensation scheme. Consideration should also be given to how you would manage if you cannot access your cash while a compensation claim is being processed. Lastly make sure that your initial deposit is less than the protected limit, otherwise when interest is added you risk losing it.

GILTS

In this part we examine the advantages and disadvantages of saving with gilts compared to cash deposit accounts. We also introduce you to our ‘Safety First Strategy’ that was specifically designed to help income seekers address the problems of falling interest rates and the complexity and uncertainty associated with saving in these risk ridden times.

If you are unfamiliar with gilts we suggest that you may find it helpful to read the ‘What are Gilts’ section before continuing.

 

THE ADVANTAGES OF GILTS - COMPARED TO CASH DEPOSIT ACCOUNTS

 

• As the there is only one provider – the government – you do not need to waste your time tracking down the best provider rates.
  
  
• You do not have to worry about the government defaulting as it has always met its gilt interest and capital repayment obligations. We are not saying it could not happen - just that it is extremely unlikely. However, with the massive failures in the banking sector - and the likely hood of more - holding cash in privately owned banks can be an unsettling experience.
• Gilts have unlimited protection – cash on deposit does not.
  
  
• With gilts you will need one account whereas with cash you may need many. This is because large deposits will need to be kept within the protection limits and the best rates can only be had by constantly switching accounts.
  
  
• Gilts provide a guaranteed fixed income - up to 2055 - whereas most cash rates are variable. Fixed rates for cash are usually restricted to a five year term.
  
  
• A gilt investment account can be compared to an ‘easy access’ deposit account in that there are usually no withdrawal restrictions. Once a withdrawal request is received by post or email, your cash will be paid into your current account – usually within three working days - and you may never have to leave your home. Many deposit accounts on the other hand require your physical presence in a branch. This is inconvenient - if not impossible - for the infirm, sick and elderly.
  
  
• Gilt investment accounts are available to all. You can operate them by telephone and post, whereas many of the best paying deposit accounts are ‘internet only’.
  
  
• With gilts there are no minimums/maximums or tiered rates that can affect your income. The amount of interest you receive is fixed at the time you invest, so you can budget and not worry about falling interest rates.
  
  
• You can buy gilts that pay a comparable rate of interest to the highest paying easy access accounts though with gilts the interest rates are fixed – from periods which currently range from a month to over 45 years. Easy access accounts, however, have variable interest rates which can change at any time.
  
  
• In addition to their fixed interest rate, gilts offer the potential for a tax free capital gain, because when demand exceeds supply their price usually goes up. Cash accounts, however, can only grow in value through the addition of interest.
• Gilt income is paid gross whereas income from deposit accounts is paid net of a 20% tax deduction. Gross income benefits non - taxpayers because they do have to waste time reclaiming the tax and taxpayers benefit because their cash flow is enhanced.
  
  
• Gilts are an ethical investment because when we buy them we are helping each other, whereas money deposited with some savings providers may be used to support businesses that contribute towards human suffering and/or pollute the environment. A note worthy exception is the Triodos Bank in Bristol.
  
  
• As part of its policy of ‘quantitive easing’ the Bank of England plans to start buying gilts in order to inject cash into the economy and reduce government borrowing costs. In doing so gilt prices should rise. As a result of this deposit account holders may suffer because if gilt yields fall, as their price goes up, they are less competition to providers, who can then reduce their interest rates without losing business.
  
  
• We believe that the gilts we use in our ‘Safety First Strategy’ have excellent capital growth potential. Our thinking is based on the prognosis that the recession will descend into a depression, investment markets will collapse and deflation will keep interest rates down. We think that there is likely to be a bubble in gilt prices soon which we plan to use as an opportunity to boost the income of our ‘Safety First Strategy’ clients. We will do this by selling the gilts at what we judge to be the top of the market and then buy them back when they have fallen to a sustainable level. This will enhance our client’s incomes - in absolute terms - and increase their wealth. Cash deposits have no capital growth potential.

 

THE DISADVANTAGES OF GILTS COMPARED TO CASH DEPOSIT ACCOUNTS

A gilt is guaranteed to be worth £100 (the par price) on its redemption date. This price could be more or less than you paid for it. If you sell a gilt the price you get could be more or less than you paid for it. With a cash deposit the minimum you get back is what you initially paid in. This is, of course, conditional on the provider staying solvent - and if not - the protection scheme paying out.

NB: As everything is relative to everything else, it is worth bearing in mind that in a given set of circumstances - like the current state of the economy – what we previously accepted to be so, is no longer so, as the circumstances have changed. A good example of this is the savings industry where until recently, few people would have said that money saved in a bank was not safe. Today, however, most people would have a different view because with increasing numbers of banks failing the common perception of what is safe has changed. Our point is that given the present set of economic circumstances gilts are seen as being a lot safer than they were, now that inflation is falling and the economy is slowing down. Gilts are being acknowledged as the new safe haven. Cash is no longer King!

 

AN INTRODUCTION TO THE ‘SAFETY FIRST STRATEGY’

In December 2003 K. A. Lincoln, predicted that a much bigger economic crisis than what followed 9/11 was likely to strike in 2006/7, and so he devised a defensive financial strategy to address some of the things – like zero interest rates - that he thought may happen. Kim launched the ‘SFS’ to his clients in 2006 when investment markets had recovered most of their post 9/11 losses. With the launch of this website the SFS is now available to any UK resident over 18.

For more information about the ‘Safety First Strategy’ please click here.

22/04/2009