Savers would be "mad" to take out Leeds 10-yr bond
Savers would be "mad" to lock up their money in the Leeds Building Society 10-year fixed-rate monthly income bond, experts have warned.
The building society claims its market-leading bond – paying 4% (4.07% gross AER) – offers eight times more in interest than the current Bank of England base rate. However, with the prospect of rising interest rates and accounts paying almost as much over far shorter terms, market commentators have said there are better deals to be had elsewhere.
The bond has a minimum deposit of £10,000 and no withdrawals are permitted over the 10-year term. Interest is paid monthly at £33 on the minimum deposit.
"We know there are savers seeking longer-term investments and at the end of the bond's 10-year term, customers will have benefited from an income totalling 40% and still have all their capital," said Kim Rebecchi, Leeds Building Society's sales and marketing director.
But Jason Hollands, managing director for business development and communications at BestInvest, does not share her enthusiasm.
"While 4% seems attractive in the current environment of ultra-low interest rates, rates are almost certain to rise over the coming years, possibly to around 2.5% by 2017 in the view of some analysts.
"Then of course you need to bear in mind that the Bank of England's target rate of inflation is 2% and interest earned may be subject to your marginal rate of tax. I think it's mad to lock your money up for a decade in a product like this," he said.
Chartered financial planner Patrick Connolly at Chase de Vere added that the bond isn't available as a New Isa. "What this means is that the effective interest rate for a basic-rate taxpayer, after tax, becomes 3.2% and for a higher-rate taxpayer it is 2.4% per year."
Personal finance expert Andrew Hagger of Moneycomms.co.uk added: "It's when you realise that you have to lock your funds away for 10 years to get a half decent return that peer-to-peer looks even more tempting – with RateSetter this morning offering 4.5% for three years and 6.4% for five years, plus Zopa offering 5.2% for five years."
However Anna Bowes, director at Savingschampion.co.uk, says the account "certainly stands out from the crowd" and could prove popular for those who are looking for a stable income over as long a term as possible. "But it should be noted that the account pays monthly interest only and must be paid away, so cannot be compounded," she adds. "While you cannot access your funds during the term, the account could be a good addition to a balanced savings portfolio, with other accounts that do allow access."
Darius McDermott, managing director of Chelsea Financial Services, points to other alternatives for savers and investors with 10-year time horizons.
"If you are willing to take some more risk, then there are a few Elite Rated funds we would recommend. For bond funds, the 24 Dynamic bond pays 4.95% currently, Invesco Perpetual Monthly Income Plus has a yield of 5% and Jupiter Strategic Bond is yielding 5.3%," he said.
For investors looking for property funds, he added that Henderson UK Property has a yield of 3.7%; while in the equity income space, Fidelity Enhanced Income has a yield of 6.35% and Premier Monthly Income has a yield of 4.47%.
Though he pointed out that, of course, yields aren't fixed.
More information on the funds can be found at Chelsea's new fund comparison tool at fundcalibre.com, which launches on Saturday 26 July.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.