LAST month we outlined how we had been advising our clients to weather the financial storm. Since then little has really changed in the markets and they certainly remain volatile in the short term.
This month we look at the advice we provide to those still uncertain that equities are appropriate for them, and would rather look for security and safety for their funds than capital growth.
We are certainly in precarious times, particularly when people are now even concerned about their deposit monies, which have been traditionally seen as having minimal to no risk at all.
Bradford & Bingley, HBOS, Northern Rock, Alliance & Leicester, the Cheshire and Derbyshire building societies have all fallen victim to the credit crunch. Amid all the turmoil, savers are becoming increasingly concerned about just how secure their deposit accounts really are.
In this article we outline our top tips on maximising your deposit returns whilst also maintaining peace of mind.
1. Nationalised banks
Over recent months there are a number of banks that have been taken over by the UK government. For example, since February the Government now guarantees all deposits with Northern Rock, irrespective of size.
At the same time Northern Rock has been eager for new funds in order to strengthen its balance sheet. It has aimed to achieve this by offering competitive savings rates. Looking to invest in one of these recently nationalised banks will mean savers will achieve high interest accounts that are also 100% guaranteed.
2. Spread amongst the banks
As not all banks or their accounts are 100% guaranteed, an alternative if you have a large amount of cash for investment is to spread the money between different bank accounts of no more than £50,000 in each. For example, if a bank became insolvent, the Financial Services Compensation Scheme (FSCS) only guarantees the first £50,000. Any amount over this is insecure (unless as above).
One note of caution: if you have savings accounts with different organisations owned by the same “parent” company, the £50,000 limit applies only once. For example, if an individual had accounts with, say, Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance, these are all part of the same group and are registered with the FSA under the name of Bank of Scotland. Any claim would be limited to a single total £50,000 for all firms.
3. National Savings & Investments (NS&I)
NS&I has always had a 100% guarantee on all deposits, because it is effectively backed by the Treasury. Although it does not usually offer the highest rates, it has seen a marked increase in savers’ deposits this year. It is not surprising that an NS&I spokesman recently announced that: “Our sales in 2007-08 were higher than expected. We achieved an additional £3 billion on top of our original forecast.”
4. Ireland
We suggest individuals consider other countries that have their own level of investor protection. For example, the Irish Government has recently promised to guarantee all bank deposits – irrespective of size – at its six main banks for the next two years. This unprecedented action was done in an effort to maintain financial stability after Irish banks’ shares collapsed.
Luckily for savers over here, those six Irish banks operate in the UK and will offer savers this 100% guarantee. It should also be noted that savers with Post Office accounts, which are provided by the Bank of Ireland, will now automatically benefit from the increased level of protection.
Anglo Irish is offering several competitive offshore accounts, including 7.05% on its one-year fixed rate bond and 6.4% on its easy access account.
We are also able to access these Irish banks through offshore investment bond wrappers meaning that the client benefits from the interest being rolled up on a gross basis rather than basic rate tax being deducted at source as would normally happen in all onshore accounts.
Summary
While these suggestions offer clients some security, this, in our opinion, is only half the story. They do nothing to protect investors from other important issues.
When considering where cash should be invested, people must ensure that they seek advice with a view to any investments being tax efficient in terms of income tax, capital gains tax and inheritance tax whilst also protecting themselves from the effects of inflation.
Base rates fell on 6th November by 1.5%. This reduction will be passed onto savers, effectively reducing their returns. Inflation is currently running at approximately 4.2%, meaning that in order to just stand still the average bank account needs to pay 5.25% gross. This is even greater for higher rate taxpayers at 7% gross.
Our view remains that equities are still the right place to invest for the medium to long term and currently offer excellent value. With the yield on the FTSE 100 at around 6% (effectively the dividend return) and base rates falling, equities are, in our opinion, looking very cheap indeed. This simple measure means that equities are paying as much as deposit accounts and also offer the potential of capital appreciation as well!
This article was written by Andrew Neale of Allchurch Bailey Investment Consultants Ltd, Almswood House, 93 High Street, Evesham, WR11 4DU; telephone 01386 442597, e-mail invest@allchurchbailey.co.uk.
