Six safe havens for savers

By NEIL SIMPSON
Updated:

 

THE horrific events in the US wreaked havoc in the trading heart of the world's financial powerhouse. Savers and investors, already reeling from a rollercoaster ride in the world's stock markets in recent months, are desperately seeking cover in the turmoil. Here, Neil Simpson looks at six less risky alternatives for anyone alarmed by the volatility of shares.

1. Deposit accounts
THE risk of savers losing money in British bank and building society accounts is minimal.

No building society saver has lost money since the Second World War. Even failing societies have been bought out by stronger rivals. In 1976, Halifax stepped in to buy fraud-hit Wakefield building society to protect customers.

Savers can also rely on protection schemes that guarantee savers the return of 90% of the first £20,000 on deposit at any failing bank or building society.

The real risk is picking a poor-paying account where your money does not keep up with rising prices.

Any account paying less after tax than the 1.8% rate of inflation should be avoided. To beat inflation after tax, a basic-rate taxpayer should choose an account that pays at least 2.25% gross while higher-rate taxpayers need one paying more than 3%.

But the majority of instant-access savings accounts pay less than two% before tax.

All returns can be boosted by holding money inside a tax-free mini cash Isa. The best cash Isa deals come from Co-op bank's smile.co.uk (5.75%), HSBC (5.45), First Direct (5.3) and a selection of building societies - Derbyshire (5.45), Nottingham (5.45), Tipton & Cosley (5.35), Cheshire (5.4) and Coventry (5.25).

2. Gilts
THESE are issued by the Government when it needs to borrow money. At issue, buyers pay a set amount for each gilt, a 'face value' that the Government promises to repay in full to holders on a set maturity date. A fixed amount is also paid regularly as interest.

Once issued, gilts can be bought and sold like shares and their capital values can rise and fall. They are traditionally seen as ideal for 'widows and orphans' - the most cautious and vulnerable savers.

Gilts may be bought using forms from post offices, though choosing the right gilts can be difficult, so seek professional advice.

David Kauders of gilt specialist Kauders Portfolio Management in Taunton, Somerset, says: 'The gilt market has been relatively unstable so far this year, but the products have still proved their worth.

'They continue to offer the chance to 'get rich slowly'. The key reason to hold gilts is for the income they pay. But if you are investing for growth and want to avoid the worst risks in other financial products, gilts are still worth considering.'

3. Corporate bonds
THESE are similar to gilts - they are effectively IOUs issued by companies in return for loans. The company promises to repay the bonds' face value on a set date after several years as well as an income (known as a yield) every year until maturity. Like shares and gilts, the price of bonds can go up and down in line with supply, demand and economic factors.

Colin Jackson of independent adviser and bond specialist Baronworth in Gants Hill, Essex, says: 'Bond yields have held up well so far this year despite rate cuts, and European bond funds in particular still offer strong income levels.'

But Jackson warns that investors' capital cannot be guaranteed and may be eroded to help provide high income. There is always a risk that companies will default on their interest payments, or fail altogether, hitting investors' capital.

Jackson also says that bond funds, all of which can be held in tax-free Isas, should be used largely by income seekers, not by investors looking for growth.

4. Guaranteed income & growth bonds
SAVERS pay a lump sum, usually at least £5,000, and are promised fixed-interest payments each month or year for a set term, at the end of which their capital will be returned.

After last week, some bonds were withdrawn as insurers reconsidered how much they could afford to pay savers. Typical three-year income bonds now pay about 4.5% a year after basic-rate tax while growth bonds promise up to 14% over their lifetimes. If an insurer goes under, savers can claim 90% compensation.

5. Property
THIS sector is also top of a cautious investor's shopping list in times of crisis. But experts say it may pay to look beyond residential property such as buy-to-let deals. Instead, funds based on commercial property are winning favour.

Independent adviser David Aaron from Woburn Sands, Buckinghamshire, says: 'Property funds can be ideal for conservative and realistic investors.'

6. Gold and commodities
THESE are frequently seen as the places to look when wider share markets are under pressure - gold in particular often rises at times of crisis. But these are specialist areas and investors should pick these funds only if they have a broad spread of more mainstream investments.

• Baronworth 020 8518 1218; David Aaron Partnership 01908 281544. For additional information on gilts, visit the Kauders Portfolio Management website at www.gilt.co.uk.

• What the experts say: 'It's been a truly awful time . . . but it will pass'

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