4.5% Return on Your Cash Savings – Too Good to be True?

Published by Sophie Fillmore on 2020 04 30

4.5% Return on Your Cash Savings – Too Good to be True?

4.5% Return on Your Cash Savings – Too Good to be True?

The dog barked as the mail hit the mat this morning.  A rude awakening that all this is real and the last 8 weeks haven’t been some strange dream.  The post brought the normal bank statements and offers from the supermarkets – pasta’s on offer, I’d like it to just be on the shelves.  Amidst all the mail was a circular from my wife’s cash savings bank account.  “Due to unexpected Bank of England base rate changes…” blah blah blah “your current interest rate is 0.15%.”  Wow is that all, I was thinking until I read on; “from the 15th of May, the rate is being reduced to 0.03% for balances up to £49,999”.  Now don’t get me wrong, if you’ve been holding cash for the last few months, you’ll be very pleased, as the markets have reacted to the shock of the pandemic and the government lockdowns of shops and society. Cash has been King, but the King is now surely dead.  To put this in perspective, a cash balance of £49,999 paying 0.03% will pay interest of £15 per annum – at least it’s not taxable, he adds sarcastically.  Not even the price of a good curry – that is if the restaurants were open.

The investment industry is nothing if not innovative, so I set about seeing what options are available to the lucky ones (now unlucky ones) holding cash.  Some clients are happy to start phasing money back into the markets on a 3-year view.  However, for many, this is still too early, as fear and concerns have not been placated but the glimmer of light may be appearing at the end of the proverbial tunnel. I recall similar concerns in the banking crisis of 2008/9 and whilst the cause of this is very different, the solutions available then are available now.

There are specialist investments available that offer both capital protection and the chance to receive a known return at a set date in the future.  The return is normally based on the FTSE 100 or some other specified indices rising over the investment term.  These are known as “structured products” or “kick-out plans”. The level of risk determines the rate that the investor receives. 

To put this in plain English, there is a cash-based deposit plan available that will pay 4.5% per annum (simple) provided the FTSE 100 is above its starting level on the 3rd anniversary (June 2023).  If the FTSE 100 is below its starting level at that point, it rolls over and is reassessed on the 4th, 5th and 6th anniversary.  If the FTSE 100 is higher than its starting level at any of these anniversaries, the plan will automatically mature with a return of 4.5% per annum.  So, if the FTSE is below its starting level on the 3rd and 4th anniversary, but is up on the 5th, then the plan will mature with a return of 22.5% (gross, potentially subject to income tax).  But what’s the risk I hear you ask.  These plans are deposit-based plans offered by a UK bank and are therefore covered by the Financial Services Compensation Scheme (up to £85,000).  If the bank goes bust, you’d have to make a claim to the FSCS, as you would with any other deposit that you hold. There is a further risk of course - if the FTSE 100 is lower at every anniversary, years 3 to 6, then then you will only receive your money back with no interest after 6 years. In essence, you’re betting your interest rate, but in light of the letter on my mat this morning, you have to consider how big a bet this actually is.

There are investment versions of these plans which have a similar structure but different risk profile but will potentially pay 9.5% per annum (subject to Capital Gain Tax), but that’s for another day or a discussion with your Adviser.

These investments need to be considered within an overall portfolio and this article is not designed or intended to provide advice and should not be construed as such.  If you would like to know more then please contact your Adviser at KDW where we will be happy to discuss the numerous options available.

Remember to get out and clap the NHS at 8pm, even if it’s raining.

Marcus Maisey

Tel 01727 85 22 99