Lump-sum savers should seek bonuses

Low interest rates and high inflation are undermining the value of cash deposits, leaving savers with large sums few secure options to earn a real return on their money.

Bank customers can earn up to 8 per cent in regular savings accounts, but such accounts do not permit lump sum deposits.

Homes for your lump sum

Savers with larger amounts from the sale of a house or business, for example, have less opportunity to beat rising prices.

“We are stuck in a period where cash on deposit does not earn a return above inflation after tax, and won’t do so for the foreseeable future,” said Nick Sketch, senior investment director at Investec Wealth & Investment.

In the past, savers with large sums looking for secure, fixed income would turn to money market accounts, which require a high minimum balance, or short-dated gilts.

But advisers say returns from both sources are now negligible, especially for higher-rate taxpayers.

HSBC, for example, offers personalised interest rates for sums of £50,000 or more, but advisers say the rates are unlikely to be high.

“We use money market accounts from time to time,” said Haig Bathgate, chief investment officer at Turcan Connell. “But at the moment the rates of return are miserly.”

Listen to Elaine Moore talk about lump-sum investment on the FT Money Show podcast

Short-dated gilts are also offering low returns following the Bank of England’s quantitive easing programme.

The next maturing gilt, the Treasury 4.5 per cent 2013 issue, has a yield to maturity of just 0.19 per cent, if bought at the current market price.

Bathgate believes savers are better off choosing enhanced retail deposit accounts.

Banks and building societies competing for cash deposits have boosted returns on accounts using short-term bonuses. A number of accounts now pay out interest rates above inflation as measured by the rate of consumer prices inflation, which stood at 2.6 per cent in July.

Nationwide Building Society pays 3.06 per cent in its online easy access account, although the rate will fall to 1.54 per cent after 12 months, once the bonus expires.

Savers happy to relinquish access for longer can earn 3.2 per cent from Aldermore’s 120-day notice account, which allows deposits up to £1m. Those willing to lock away their money for a year can earn 3.45 per cent from the UK arm of Pakistan’s United Bank Limited (UBL).

Sam Parkes at Duncan Lawrie Private Bank said that easy access accounts are useful to those who might want to use their money in the next year, but she advises savers to spread their money in order to limit risk.

The UK’s Financial Services Compensation Scheme guarantees up to £85,000 per saver if an institution fails, but funds held in separate accounts in brands that are part of one group may not be protected individually. Nationwide, for example, shares its £85,000 compensation limit with Cheshire, Derbyshire and Dunfermline Building Societies.

Savers with UK branches of foreign banks are also not always be covered by the scheme. UBL is part of the UK’s scheme but ING Direct is part of the Dutch compensation scheme, which protects up to €100,000 per saver – around £78,700 at current exchange rates.

“Peer-to-peer” online lending sites, such as Zopa, which have become increasingly popular with savers and borrowers, are also not covered by the FSCS.

From Friday every UK bank, building societies and credit union must display information about whether it is covered by the FSCS or another scheme, to reassure savers about the protection of their funds.

Savers who are especially concerned about deposit protection should consider National Savings & Investment, said Parkes. NS&I offers 100 per cent backing from the Treasury. Although popular index linked and fixed interest savings certificates are currently not available, the government-backed provider offers premium bonds and deposit accounts. However, advisers say the rates are poor and premium bonds offer no return unless you win a prize.