Tuesday 11 October 2011

Portfolio Buy: BM Savings 5-year 4.5% Fixed-Rate Bond (Postal)

One of my fixed-rate savings bonds has recently matured.  Investing cash for a fixed period in return for a high return is Level 3 of the DIY Income Investor Income Pyramid. As part of the management of the portfolio, it is necessary to occasionally 'roll over' these savings accounts as they come to the end of their term, as inevitably the bank tries to put the money in a low-interest account and hopes you won't do anything about it!

However, in the UK it's getting harder to find a good (temporary) home for your money...

There are three things going on at the moment, which are impacting each other:
  • the rate of inflation is much higher than the Bank of England (BoE) would like, but the Bank expects inflation to fall fairly rapidly in future
  • the BoE base rate is much lower than it should be, given the rate of inflation - but the BoE is worried about the effect that higher rates would have on the struggling economy and want to avoid a recession (and has been pumping money into the financial system)
  • money market 'swap rates' have been falling, signalling that the better fixed rate deals are getting harder to find

Of course, tax continues to be a key issue - as you want to maximise your after-tax income. As always, make sure to apply for tax-free payment of interest, if you are entitled to. In our case, we don't pay any tax on the income from our cash savings accounts and our stock market investments are in tax-shielded ISAs.

The account we decided on was the BM Savings 5-year 4.5% postal bond, which can be opened online  but is managed by post. Although the maturing bond was also with BM Savings, I couldn't find an easy way of transferring the money, so I had to withdraw the cash from the matured cash and then re-invest it.

The account pays interest annually and although withdrawals are possible (with loss of interest) I wouldn't suggest you plan on withdrawing your money during the term.

This rate of interest is less than has been available on similar accounts over the last few years, indicating a tightening of the financial market. The 4.5% rate is less that the current rate of inflation in the UK, which is worrying; however, I am expecting the rate of inflation to fall in the next year or so. For that reason I am staying away from inflation-linked savings accounts.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

No comments:

Post a Comment