The June inflation figures released on 12 July by the Office for National Statistics gave some good news – the annual rate of inflation fell, with the consumer price index (CPI) figure standing at 4.2% down from 4.5% in May and the retail price index (RPI) figure down from 5.2% to 5%. The main factor behind the fall was a reduction in the costs associated with toys and hobbies particularly computer games! Food however saw a rise of almost 1% over the same period.
Although a reduction in inflation, however small, is good news in reality it offers little consolation for those saving in bank and building society accounts. A quick search via www.moneyfacts.co.uk * shows that the best rate being offered if you are willing to commit your money to a 3-year term is 4.26% (AER) with Whiteaway Laidlaw Bank postal account with the best 5-year rate being offered by Chelsea Building Society for its Fixed Rate e-Bond and online account of 4.85% (AER). So even by locking your money away for five years the rate of return is still less than the current rate of inflation. Mervyn King, the governor of the Bank of England, provides little hope for savers as he recently told the Treasury select committee that inflation would stay too high for two to three years with no need to raise interest rates severely.
Many savers place their hard earned cash with bank and building societies on the basis that they don’t feel comfortable with the risks associated with other forms of investments such as the stock market. However what the figures above show is that one of the major risks to capital, at the moment, is inflation. Even the best accounts cannot match CPI and the difference becomes even greater for basic and higher rate tax payers.
One alternative may be to invest in structured products? Structured products come in many different shapes and sizes and are complex products that, I would suggest, should only be entered into after taking professional advice. In the past I have heard some financial advisers refer to all structured products as guaranteed investments. Whilst some do indeed provide capital guarantees the majority of products do not and great care should be taken in looking beneath the skin of some products to see what element of capital protection is given and by whom.
For those savers looking for an alternative to traditional bank and building society accounts structured deposits may offer a good option. These products give the full protection of the Financial Services Compensation Scheme (FSCS) but with the interest rate linked to the performance of the FTSE-100, for example, over a set term, with a guarantee of a return of capital whatever happens at the end of the term. Therefore such products allow savers the opportunity to benefit from share based returns without the risks to capital. It may even be possible to invest in such products using a cash ISA therefore avoiding any tax charge on maturity.
There will always be a need to keep cash in the bank but keeping too much may damage your wealth. Speak to an independent financial adviser to see if a structured product is suitable for you.
*figures at 18 July 2011.
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