Low interest rates mean cash savers could be looking for alternatives

Monday, September 23, 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 savings plans.

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 guaranteed.

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.

Past performance

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 plans.

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.