Low interest rates mean cash savers could be looking for alternatives
23 September 2013
Once again this month, the Bank of England has made no changes
to the level of interest rates, and it is widely predicted that
this situation is likely to remain for the foreseeable future with
the Bank going so far as to confirm this themselves. What
this means is that there will be further pain for cash savers, but
mortgage rates will remain cheap.
The current Bank interest rate remains at a record low of 0.5%
and Mark Carney, Governor of the Bank of England, has said that the
Bank would only consider raising this rate if the UK unemployment
rate fell below 7% (currently 7.7%) with some predicting that this
could take up to three years.
Whilst this is good news for mortgage borrowers, a low interest
rate means that cash savers are finding it hard to find a decent,
inflation beating return for their savings. In order to avoid the
spending power of savings being eroded, the money needs to be put
to work and this is where alternative savings vehicles, such as
with profits, could offer a solution. Foresters Friendly
Society is one such provider of mid to long-term with profits based
With-profits funds invest in a range of different assets such as
equities, property, fixed-interest type assets (such as government
bonds and corporate bonds) and cash. With profits policyholders'
money is invested, along with other policyholders' money, into the
fund. This provides their policies with the potential to
grow, dependent on the with profits funds' performance. Any
profits generated by the investment of the assets within the with
profits fund are paid out via an annual bonus and possibly a final
bonus when the policy ends however the addition of any bonus is not
In the case of Foresters Friendly Society, controls are in place
to minimise the risk that comes with investing by choosing assets
of good quality and setting limits on the amounts invested in any
one asset e.g. equities.
The Society smoothes the returns paid to with profits
policyholders. This means that in good investment performance
years, Foresters may hold back some of the investment return and
use it to top up bonuses in years when the fund performs less well.
This is done with the main aim of protecting policyholders from
short term fluctuations in the value of assets within the
fund. However, this approach doesn't protect policyholders
from long term and sustained falls in asset values.
In April 2013, the Foresters with profit fund was commended once
again in the highly respected Money Management With Profits
survey*. Each year, Money Management magazine examines the
with profits sector comparing the performance of these funds.
Despite many commentators heralding the end of with profits, the
latest results show that the sector is capable of competing with
investment funds and savings accounts across all time frames.
Foresters appeared 6th out of 55 companies according
to maturity values for a male aged 30 over 20 years* and was
commended for the strength of its performance achieved from a
balanced blend of equities, fixed income and property
investments. The report also noted that where the real
positive figures lie are in the payouts from providers, like
Foresters, which are still open to new client business.
Past performance is not a guide to future performance. You may
not get back what you pay into some Savings and Investments
This article should not be considered to be advice. If you are
uncertain as to the suitability of with profits investments, please
seek financial advice.
*The Money Managements Survey, April 2013, looked at maturity
and surrender payouts for a male non-smoker who is under 30 paying
£50 a month into a With Profits policy. These figures are
then compared with the figures from other providers to compare
companies' past performance.