Cautious savers inherit the wealth
Taking the cautious route does not have to mean pitiful returns. Government-backed National Savings & Investments is the safest place for cash deposits and index-linked certificates stand out from the pack. Tax-free, they pay the rate of inflation plus 0.7%, providing 4.9% gross at present.
It means the equivalent rate for a basic-rate taxpayer would be 6.13% gross - 8.17% gross for a higher-rate taxpayer. The only downside is that cash must be tied up for either three or five years.
Ironically, newly nationalised Northern Rock is now among the safest places for your cash. It has a one-year fixed-rate bond paying 6.35% gross and an instant-access online savings account paying 6% gross. But savers can get higher rates elsewhere.
‘While Northern Rock offers Government-backed safety, savers can do better,’ says Kevin Tooze at independent adviser Equity Partners in Brentwood, Essex.
But while he recommends shopping around for the best rates, he also reminds savers not to exceed the Financial Services Compensation Scheme’s £35,000 limit for cash savings with any one banking group or institution.
Savers can achieve more than 7% gross fixed for one year in cash deposits. Nigerian-owned FirstSave is paying 7.1%, West Bromwich Building Society is offering 7.05%, Icelandic-owned Icesave and Kaupthing Edge are both paying 7.01%, while Bradford & Bingley is offering 7%. Abbey is paying 7.01% over one year for investors with at least £30,000 to deposit.
Halifax has launched an account paying 10% gross, though this is a regular saving account, so a maximum of £500 a month can be deposited. With cash rates at this level, savers might think there is no need to consider equities, but it is important to remember that tax and inflation will eat into capital.
Julie Smith at independent adviser AWD Chase de Vere in Bath, Somerset, says: ‘Cautious savers naturally want a decent proportion of their portfolio in cash. Luckily, rates are excellent at the moment.
‘That said, inflation will erode cash and investors must think about long-term growth. The answer is stock market exposure.’
Smith favours capital-protected investment plans, also known as guaranteed equity bonds, which protect the initial investment and returns it in full at the end of the plan’s term -typically five years.
They also offer returns based on the performance of a specific stock market - such as the FTSE 100 index - and they can usually be put into an Isa.
The downside is that plans can be complicated and give poor value for money due to fees and caps on the size of returns. Also, investors cannot access their money until the plan matures.
Smith’s recommendations include Zurich Green Guaranteed Account, which offers 100% of the rise in the RBS Green index.
The index holds companies active in the ‘green’ business sector and provides exposure to sectors including biotechnology, biomass, hydro-electricity, solar and wind energy. The minimum investment is £2,500 for five years and it can be held within an Isa.