Savings may be making a comeback as workers realise their pensions alone may not be enough for their retirement

by Haydon Wood,
Jeremy Gates reports on whether it is possible for workers to find an attractive deal to save for their retirement
BEHIND the threat of mass strikes by public sector workers this week lies a simple truth which many in the private sector grasped some time ago; pensions alone can’t keep many in the style we would like when we put our feet up.
While “generation rent” (20-to 30-year-olds) fears it might never be able to buy a home, older people must try to salt spare money away. Suddenly, a flood of new savings accounts is making the idea more attractive.
Hard on the heels of Santander’s two-year fixed-rate bonds paying 4.0%, the Post Office has launched the second issue of its inflation-linked bond, promising to pay Retail Price Index (RPI) plus 1.5% gross for five years, or RPI plus 0.5% gross over three years.
With RPI currently at 5.2%, that means a current return of 6.7% – almost like the good old days when savers got a decent return.

But, unlike the National Savings & Investments (NS&I) inflation-linked certificates, returns on Post Office bonds are taxable, meaning a return of 5.36% for basic rate taxpayers and 4.02% for those on higher rate tax.
However, Andrew Hagger, at financial website Moneynet.co.uk, thinks the Post Office move reflects a new trend.
“Providers have realised that it is not just low rates which savers are angry about, it is the rising threat of inflation, too,” he says.
“Birmingham Midshires and Kent Reliance have already dabbled in this sector, before the heavyweights like NS&I and the Post Office. Fear of inflation is creating a new product area as savers demand something better.”
A key feature of Yorkshire BS’s inflation-linked Protected Capital Account is the promise of an attractive minimum return, should the rate of inflation fall during the investment period.

Savers can either take an annual income option, matching the current level of RPI, or the maturity return at the end – whichever is the greater return of 18% or the percentage change in RPI over the full six-year term.
Meanwhile, Barnsley BS offers two online bonds: three years at 4.05% gross, or five at 4.65% gross.
According to financial data agency Moneyfacts.co.uk, the number of savings accounts available to personal, business and offshore savers stands at 2,385, the highest level since it began to record figures in 1988, when there were only 203 accounts on the market.
Michelle Slade, at Moneyfacts.co.uk, says: “Since the credit crisis began, savers’ deposits have been increasingly in demand among providers keen to use in-house sources of funding for lending, rather than entering the money markets.
“Increased competition for savers’ deposits has led providers to branch out into new markets, particularly the longer-term fixed-rate market. So much so, that the average four- and five-year fixed-rate bonds are paying higher rates than those on offer at the start of December, 2008, when the bank base rate stood at just 3.00% – against 0.5% today.
“Going forward, providers will not want to maintain the wide margin between the bank base rate and the rate paid to savers. Providers might only pass on a part of any future base rate rises to savers, in a bid to reduce this margin.”
There is scope to make money work more efficiently in the short term, too.
ING Direct Savings Account pays 3.00% on minimum £1 deposits, with easy access, but that includes a 2.46% bonus payable for the first year of the account.
The potential of steady saving is underlined in figures from fund manager Fidelity, based on the past decade when big company shares on London’s FTSE-100 have largely traded sideways.
Fidelity looked at the performance of three of its most popular funds for savers investing £100 and £200 per month. Over the 10 years, that’s a total sum of £12,000 and £24,000, respectively.
Fidelity’s £2.5bn MoneyBuilder Income Fund, holding corporate bonds, has turned £100 a month into £15,506; £200 per month into £31,012.
Its UK Aggressive fund, holding UK equities, has produced £19,338 and £38,677 respectively. And its South-East Asia Fund has delivered £32,743 and £65,485.
Tom Stevenson also tips Fidelity’s £475m Multi Asset Strategic Fund, holding a mix of equities, bonds, commodities and cash, which has delivered annual growth of 5.7%.
Saving, as a long-term strategy, still makes sense – not least because only savers benefit if and when global stock markets eventually break out from a decade of dull under-performance.
At Bristol-based Fair Investment Company, head of investments and savings, Oliver Roylance-Smith, says: “One of my golden rules is to save at least 10% of your income as soon as it comes in.
“It is amazing how quickly you get used to managing without it and how being disciplined can have a real impact.
“These are difficult times for cash savings generally, but compound interest really adds up, especially if you drip feed regular contributions. Somebody investing £525 per month into a stock and shares ISA for five years, assuming annual growth of 7.00%, is sitting on £36,852.83 after five years.
“This calculation shows that, even if you can’t afford to invest the full amount each year, and don’t benefit from market-leading returns every step of the way, you can still build a healthy fund.”
Keep paying in that pension, particularly if your employer does, too. But canny savers know they must set aside a bit more, on a regular basis.
INFORMATION: Fair Investment Company (0845 308 2525 and www.fairinvestment.co. uk); Post Office (08457 223 344 and www.post office.co.uk); Santander (0800 234 6065 and www.santander. co.uk); Fidelity (0800 414 161 and www. fidelity.co.uk). Online initial charges for investing inside or outside an ISA typically range from 0.5%-1.25% (depending on fund provider) while 100 or so funds, including Fidelity MoneyBuilder, make a 0% initial charge.