Are linked investment and savings plans worth it?
With interest rates historically low, banks are finding new ways to bump up the rates they offer on savings accounts. One strategy that achieves this is the linked savings and investment plan, where you're rewarded with a high rate on your savings provided you put money into an investment product.
The main provider of these types of account is Santander, which has offered its Super Range through its Abbey brand for several years, and now also offers it through Alliance & Leicester and Bradford & Bingley.
Super range of accounts
Its current range of savings accounts includes a bond, a monthly savings plan and an individual savings account: you get access to higher rates provided you invest the same amount, or more, into one of its investment products. These include its pensions as well as its single premium investment products.
For example, Abbey's Super Bond (issue 11) offers a fixed interest rate of 6.5% AER (5.2% net) until 1 October 2010 on balances from £250,000. In contrast, Abbey's non-linked one-year bond pays 3.25% AER (2.96% net). The minimum amount you can pay in is £1 and the maximum is £2 million; this issue of the bond matures in October 2010.
HSBC has also recently launched this type of product: the World Selection high interest deposit bond. It was first available in May, with the offer closing at the beginning of August, and it will be relaunched in October.
With this, if you invest at least £10,000 into its World Selection portfolio, or £500 a month into its World Selection personal pension, you can put the same amount, up to a maximum of £100,000, into a high interest deposit bond paying 5% gross (4% net) fixed for a year.
Richard Brown, head of savings at HSBC, explains the thinking behind the product: "The savings market is becoming increasingly competitive, but we wanted to put together a product that would enable us to offer a more attractive rate.
The World Selection portfolios are designed to match investors' attitudes to risk and give investors access to the best fund managers from around the world."
Certainly, rates on Santander and HSBC products are higher than you"d get elsewhere.
For example, the best stand-alone one-year fixed-rate bond is offered by Chelsea Building Society, which pays 3.8% AER (correct 16/09/2009).
"The investment-linked products give quite a premium on their savings rates," says David Black, principal consultant for banking at Defaqto. "Although there are only two banks offering this type of product at the moment, I wouldn't be surprised if it became more common. It"s a good way for the banks to attract business and allows them to cross-sell further products."
But while these products might be good marketing tools for the banks, the response from independent financial advisers is decidedly lukewarm.
Michael Owen, financial planning director at Brooks Macdonald Financial Consulting, says that just because the savings rate is a "rate buster", it doesn"t mean the overall product is good.
"You may be better off shopping around for the component parts to get the best overall return on your savings and investments," he adds.
Also, although you"d be hard-pressed to beat savings rates in the current market, Black says interest rates are on the up as the market gets more competitive. This could make tying your money up for a year less attractive.
Amanda Davidson, director of IFA company Baigrie Davies, is also reluctant to give this type of product the thumbs up. "The banks want to sell their investments so they offer a high savings rate to attract business. Look very carefully at the investment, as it only takes slight underperformance to cancel out the extra interest on your savings," she says.
However, she adds that you might want to consider them in some circumstances. She explains: "If you"re going to put some money into the investment anyway then take advantage of the high savings rate, but don"t invest simply to get a higher interest rate on your savings."
This article was originally published in Money Observer - Moneywise's sister publication - in September 2009
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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.
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.