?43 billion will reportedly be wiped off the value of UK savings over the next year thanks to record low interest rates and high inflation, according to This is Money, based on
?43 billion will reportedly be wiped off the value of UK savings over the next year thanks to record low interest rates and high inflation, according to This is Money, based on calculations by campaign group Save Our Savers.
The last year has not been much better. Moneyfacts reports that the number of UK savings accounts offering real returns for basic rate taxpayers dropped from 91 to none over the last 12 months, leaving savers in an ?impossible position?.
Wherever you live, if the prices of staples like food and fuel increase faster than your savings do, the value of your cash is eroded. Average inflation for the EU was 3.4% in October and the European base interest rate was cut to 1.25% in November.
Some savers do not realise the toll inflation could take on their savings if they leave all their capital in the bank long-term. Others appreciate the risk but are wary about investing directly in equities.
I am often asked for recommendations for low risk investments, understandably more so at the moment. With the current interest rates and market situation, more people are looking for alternatives to cash but without the attendant risks of equity investment.
There is always some sort of risk with investments so it is important to take all the steps you can to lower your investment risk and you should speak to your wealth management adviser about this.
Looking at individual investments though, a capital protected fund would enable you to invest in stockmarket rises at the same time as protecting your capital from stockmarket volatility.
Capital protected funds are designed to provide you with exposure to rising equity markets, usually by providing a return linked to a major stockmarket index or indices, but without investment risk to your capital.
The key is to select a fund that offers a 100% capital protection. This means that even in turbulent market conditions you are assured that you will get back your entire original capital (provided you hold it full term). Conversely, when market conditions are favourable, you can enjoy substantial rates of return.
Capital protected funds can therefore be an attractive alternative to cash for medium term investors seeking the potential for improved returns above those available on cash deposit and the potential to beat inflation. They are also useful as a risk reduction tool in a diversified portfolio.
The only investment risk with these funds is that you would miss out on any interest you would have earned if you had left your cash on deposit, but if you expect interest rates to remain low you may consider this an acceptable risk, especially considering your capital has the potential to grow without you having to worry about your capital.
With stockmarkets having fallen this year, if you were to invest in a fund which does not mature for a few years there is a reasonably strong expectation that markets will have improved by the end of the term ? though this cannot be guaranteed.
There are a couple of points to note.
These investments are for set terms and you may need to tie your capital up for over five years. While you may be able to access some or all of the funds if necessary, this could affect the guarantee and returns so you should be reasonably confident that you would not need the capital. The funds are also unsuitable for anyone who needs income.
The 100% capital guarantee does not cover institutional risk. Since these investments are guaranteed by a bank, make sure the bank has a credit rating of at least A+. For peace of mind you want it to be a ?too big to fail? bank.
Investor protection should the investment firm offering the fund fail varies from country to country and the type of arrangement.
One way you can achieve more security is to invest through a Luxembourg life assurance policy as the law there provides maximum protection to policyholders. Your assets are held by a custodian bank, thus ensuring they are entirely separated from the investment company?s shareholders and protected from creditors. The investment funds are held off the balance sheet of the custodian bank so the securities remain in segregated client accounts and are entirely protected (except assets held as cash).
Life assurance arrangements are also taxed very favourably in many European countries
In this case, a capital protected fund could be a tax efficient investment vehicle for a single lump sum, with 100% minimum return of capital, 100% capital security and a return linked to market rises.
There are different types of these funds available so you need to consider the terms of the one you are considering and the investor protection regime of the country it is domiciled in. Although at a glance they can appear similar, some are more risky than others, so you should take professional advice. These funds are also not necessarily suitable for everyone and you need to consider your personal circumstances, objectives and the other assets you own. A wealth manager like Blevins Franks would review your situation, portfolio and risk profile before making recommendations on what would be suitable for you.
By Bill Blevins, Managing Director, Blevins Franks
23rd November 2011
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.