A wolf in sheep’s clothing? - when all is not what it seems

06th September 2017

Savers looking to boost their returns are becoming increasingly tempted by ‘bond’ products that are passing themselves off as, or look very similar to, deposit savings accounts, but are actually investments and can be far riskier than a cash account.

It is little wonder with the Bank of England base rate remaining at a record low, and now not expected to rise until 2019 at the earliest, that savers are searching for better rates. It is always the right thing to do. 

However, given the number of our clients who have called us with questions about why products they perceive as savings ‘bonds’ are not in our best buy tables, there is a real danger they could be buying a wolf in sheep’s clothing without taking the right advice.

We’re not saying that there is anything wrong with these products per se, but we do believe in calling a spade a spade. 

It’s important to ensure that you really do understand what you are putting your savings into, how it differs from cash and that you understand the risk implications, before you make any investment decisions - which is what these bonds are.

'consulting a good, reputable adviser is key'

The trouble with the word ‘bond’ is that it’s applied to so many variations of both investment and savings products, so it can be hard to differentiate between them and that is why consulting a good, reputable adviser is key.

One series of products we are often asked about are the Castle Trust Fortress Bonds, which currently pay 2.2% AER on a one-year bond and up to 2.7% AER on a five-year bond.

If these were standard deposit accounts, then they would be topping our best buy tables, although standard best buy fixed rate bonds are not far behind.

But these bonds are loan notes – primarily to UK residential property owners, secured by a mortgage. Therefore, they hold a very different risk to deposits placed directly in a bank or building society savings account.

Different levels of protection

The Financial Services Compensation Scheme (FSCS) limit of £50,000 for investment products applies to these bonds if Castle Trust was to fail and if the claim is validated.

This is a very different scenario and offers far less than the protection you would have in a deposit savings account, which is a simple, guaranteed £85,000 per person, per banking licence.

Savers need to understand the varying risks and complexities associated with products that are not simply deposit based.

We feel that often not enough is done to highlight the differences and the potentially higher risks that might apply. That’s the problem with investing without advice.

That said, as long as savers do understand what they are investing into, there is no reason why some would not be happy taking this different risk to get the extra reward, but we suggest you ensure you get some advice about what you are investing in first.

In short, if the rate of return you can see is market-leading but it is not on our best buy tables (remembering that we research the WHOLE savings market on a daily basis) then the chances are it is not a deposit-based savings bond.

But you can always give us a call and we can help you understand more about the product in question.

If it is an investment bond, rather than a savings bond, we will not be able to advise on the appropriateness of the product for you. We research and offer guidance on cash but we also know that the best advice always considers all asset classes, based upon personal circumstances and your appetite to risk. We can introduce you to trusted experts who will be able to advise you on whether the particular product is right for you.

After all, you should always be clear about when you may or may not get all your money back!

So, if in doubt, always give us a call on 0800 011 9705 or send an email to [email protected]. We will be happy to help you with your query, and point you in the right direction.

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