Cash Savings Bonds — Protecting Your Investments In A Volatile World
A Zurich Club Special Report
By Andrew Lomax
Amidst the turmoil of the past few months, it is all too easy to lose sight of the fact that gyrations in world markets and swings in sentiment are to be expected in a fully functioning, integrated global economy. To put recent events into the vernacular, ‘the toilet has to be flushed sometimes’. Junk bonds have crashed in the past. Nothing goes up in a straight line forever. However, in the midst of the noise, it is important not to lose sight of a few home truths.
Firstly, even by 21st century standards of hyperbole and hysteria, the reporting of recent corporate events and the media interpretation has been exaggerated. The correction seen in the US property market, and bad debt losses by financial institutions, are phenomena that occur roughly every 10 years. Some recent reporting of institutions ‘covering up losses’ appears to be more journalistic myth than fact. While UK and US markets have fretted, in China and elsewhere in the Asia Pacific region, stock prices have scaled new heights. So have gold, oil and other commodities.
Secondly, at times of stress we need to remind ourselves that investment activity is in many respects a voluntary pastime. And one that does not have to be added to our worry lists. Last, but by no means least — it’s still possible to make money, whatever the market is doing, by keeping some of your investments in cash.
Cash savings bonds: A back to basics
approach in vogue
And that is just what smart investors are doing right now. The hunt is on for safe havens for parking short-term cash. Not for a lifetime, just until the markets right themselves again and confidence returns. It is a good time to be looking at these bond instruments given rises in bank base rates; in the absence of a big inflationary scare, they are unlikely to go much higher.
The higher cost of interbank lending has led to the High Street banks increasing the rates they offer to depositors. Special deals are emerging prior to Christmas in an attempt to entice cash that would otherwise likely be spent elsewhere. While obviously the most prudent and tax-efficient savings method is to repay credit card and mortgage debt, our focus here is on cash parking of investment funds that would otherwise be invested in stocks.
The Yorkshire Building Society is offering a one year bond maturing on 31 December 2008 paying 9.5% gross (7.6% net). This bond has a minimum £1,000 investment and must be bought alongside a Legal & General investment bond which has a minimum investment of £5,000. An investment of £6,000 would therefore be the minimum for both bonds.
The L&G bond is invested in UK fixed interest securities, commercial property and cash and should be held for five years. However, the holder is allowed to buy up to £5,000 worth of the 9.5% Yorkshire Bond alongside a £5,000 Legal & General bond so will get their cash back on 1 January, 2009 with the interest rolled up. This product combination can only be bought after consultation with an L&G salesman/ adviser on 0845 1200 100.
Other interesting products include the Yorkshire Rollover Bond, paying 6.25% gross, in which you can invest up to £500,000 for one year. The interest on the bond is set monthly for the following year, so this is particularly useful for locking in an annual rate if you take the view that interest rates have peaked and the next move is down.
Cash savings bonds: "Weakest link"; tax-free
rates at National Savings
Another option is to simply use National Savings. We were surprised to find that their tax-free savings products were pretty mediocre — at least in terms of interest. But anyone can invest up to £15,000 in NS&I fixed interest savings certificates without having to declare the interest on their end of year tax return. The two year certificate pays a tax-free 3.6%, the equivalent of 4.5% for basic rate taxpayers and 6% for higher rate taxpayers.
However, these have a ‘step-up’ structure with 3.5% earned in the first year and 3.71% in the second year. National Savings does offer a five year deal that works out at 3.5% tax free — but that rate is hardly compelling.
Cash savings bonds: Low overhead
Internet banks pay more
Finally, the internet banks are also offering some good deals. Internet banking is worth considering for smallish sums of up to £20,000 where easy access is a factor.
Since its launch in the UK, ING Direct (www.ingdirect.co.uk) has come under scrutiny for failing to keep its rates in line with increases in the Bank of England base rate. However, its current rates, coupled with the ease of accessing your money, means ING is back in favour with savers. The bank is currently paying 6% gross on all new accounts until 31 January, 2008 when the rate falls to 5.4%. This account allows easy access either by telephone or on the internet.
First Direct’s (www.firstdirect.com) reputation for innovation, first in phone banking and now on the internet, is well deserved. Its ‘Regular Saver Account’ pays 8% gross pa for customers who agree to pay up to £300 a month into its account for one year. Clearly intended to draw new accounts, the offer is a useful way to park surplus monthly cash short term. More regular saving is via the Bonus Savings Account for deposits of over £3,000 which attracts 5.5% variable with a bonus (assuming no withdrawals over the month), and comes with the advantage of immediate access to your money.
Cash savings bonds: Permanent interest bearing
shares also useful cash park
Permanent interest bearing shares (PIBS) are shares issued by building societies, or former building societies that pay a fixed coupon and can be bought and sold on the stock market. They usually come in denominations of £5,000, £10,000 and £50,000. They pay interest bi-annually and are low risk. In terms of risk, they rank after actual deposit accounts in the event of a winding up, and are not protected by the Financial Services Compensation Scheme. However, no building society has ever missed a payment. The table below also includes perpetual subordinated bonds (PSBs), which are similar to PIBS in that the issuer is only obliged to pay interest, making the bond more sensitive to higher inflation and interest rates.
For example, take the first Bradford & Bingley perpetual subordinated bond listed below. To buy £1,000 of this bond it would cost you £1,430 plus accrued interest, but as the holder you receive a yield of 8.13%, assuming the price of the bond remains constant. The gross interest pick-up on PIBS and PSBs is to the order of 1%-2% when compared to interest bearing accounts and is certainly worth considering for one-to-two year cash parking.
| PIBs & PSBs (Correct as of 24 October 2007) | |||
| Name | Price | Yield | Pay date |
| Bradford & Bingley 11 5/8% Perp. Sub Bonds. | 143 | 8.13 | 20/1, 20/7 |
| Bradford & Bingley 13% Perp. Sub Bonds. | 157.5 | 8.25 | 7/4, 7/10 |
| Bank of Ireland 13 3/8% Perp. Sub Bonds. | 179 | 7.47 | 7/5, 7/11 |
| Britannia 5.5555% PIBS (call 14/12/2015). | 94 | 5.91 | 7/5, 7/11 |
| Britannia 13% PIBS. | 186 | 6.99 | 31/1, 31/7 |
| Cheltenham & Gloucester 11 3/4% Perp. Bonds. | 184.125 | 6.38 | 28/4, 28/10 |
| Cheshire 6.875% PIBS (call 10/1/2019 @ 100p). | 105 | 6.55 | 10/1, 10/7 |
| Coventry 6.092% PIBS (call 29/6/2016 @ 100p). | 96 | 6.35 | 29/6, 29/12 |
| Coventry 12 1/8% PIBS. | 176 | 6.89 | 1/3, 1/9 |
| Derbyshire 6% PIBS (call 15/12/2016 @ 100p). | 96.5 | 6.22 | 15/6, 15/12 |
| First Active 11 3/4% Sub Bonds (1% Stamp). | 160 | 7.27 | 11/5, 11/11 |
| Halifax 8 3/4% Perp. Sub Bonds (call 14/9/2023 @ 100p). | 123.25 | 7.10 | 1/3, 1/9 |
| Halifax 9 3/8% Perp. Sub Bonds. | 138.5 | 6.77 | 1/3, 1/9 |
| Halifax 12% Perp. Sub Bonds (call 30/1/2022 @ 100p). | 149.5 | 8.03 | 1/3, 1/9 |
| Halifax 13 5/8% Perp. Sub Bonds. | 214.25 | 6.36 | 10/6, 10/12 |
| Kent Reliance 7 7/8% PIBS (call 27/8/2014 @ 100p). | 110 | 7.16 | 27/2, 27/8 |
| Leeds 13 3/8% PIBS. | 189.5 | 7.06 | 31/1, 31/7 |
| Manchester 6 3/4% PIBS (call 13/4/2030 @ 100p). | 105.5 | 6.40 | 13/4, 13/10 |
| Manchester 8% PIBS. | 121.75 | 6.57 | 27/4, 27/10 |
| Nationwide 6 1/4% PIBS (call 22/10/2024 @ 100p). | 102 | 6.13 | 22/4, 22/10 |
| Nationwide 7 1/4% PIBS (call 5/12/2021 @ 100p). | 109.25 | 6.64 | 5/6, 5/12 |
| Newcastle 10 3/4% PIBS. | 158 | 6.80 | 22/6, 22/12 |
| Newcastle 12 5/8% PIBS. | 184.5 | 6.84 | 15/3, 15/9 |
| Northern Rock 12 5/8% Perp. Sub Notes. | 96 | 13.15 | 30/6, 31/12 |
| Nottingham 7 7/8% PIBS. | 116 | 6.79 | 14/6, 14/12 |
| Principality 7% PIBS (call 1/6/2020 @ 100p). | 103 | 6.80 | 1/6, 1/12 |
| Scarborough 6.875% PIBS (call 13/04/2017 @ 100p). | 107.5 | 6.40 | 13/4, 13/10 |
| Scarborough 8 1/2% PIBS. | 131.5 | 6.46 | 26/4, 26/10 |
| Skipton 12 7/8% PIBS. | 185 | 6.95 | 31/1, 31/7 |
| West Bromwich 6.15% PIBS (call 5/4/2021 @ 100p). | 87.5 | 7.03 | 5/4, 5/10 |
Andrew Lomax for The Zurich Club
First published on November 17th 2007
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