"The Bank of England base rate currently stands at 0.1 per cent and it seems very unlikely that central bankers will be considering raising interest rates any time soon."
Peter Green
Earlier this week National Savings & Investments (NS&I) announced it would dramatically cut the interest rates available on its products from 24 November 2020. Commenting on this development, Peter Green, chief executive of Healthy Investment, said these changes added further weight to the case for cautious investors to consider with-profits funds.
Greater Manchester-headquartered Healthy Investment is one of the UK’s oldest friendly societies. It provides ISAs, Investment Bonds, Junior ISAs, Child Trust Funds and savings plans to more than 110,000 members.
The majority of Healthy Investment’s products are invested in ethical, cautiously managed with-profits funds that “smooth” returns for investors, ironing out many of the peaks and troughs generated by volatile markets.
Mr Green said, “NS&I has traditionally provided a home for many of the UK’s more cautious savers. Yesterday’s announcement, however, means most of them now face the prospect of their money falling in value as interest rates do not come close to matching inflation.
“Even if the cost of living were to rise by just one per cent per year, a return of 0.01 per cent on an NS&I Income Bond would see the value of savings eroded.
“Cautiously managed with-profits funds, by contrast, invest in a combination of money market funds, government and corporate bonds, property and equities. This provides the possibility of long-term growth while minimising risk as far as possible by diversifying the range of assets they hold.”
With-profits funds use a practice called “smoothing” to retain some of the returns made in strong years which can then help mitigate the effects of falling markets in weaker years. This means with-profits tend to provide a more predictable investment experience than, for instance, investing via unit trusts.
In many cases with-profits policies are also able to provide capital guarantees. While not equivalent to cash, these guarantees mean investors can be confident that, as long as they stick to the provider’s terms and conditions, their capital will be secure in the long-term.
Mr Green continued, “NS&I’s move is unlikely to be a one-off in the savings market. The Bank of England base rate currently stands at 0.1 per cent and, given the economic headwinds we face, it seems very unlikely that central bankers will be considering raising interest rates any time soon. There is also likely to be political pressure to inject inflation into the economy to help erode the value of the national debt.
“Of course, with-profits funds aren’t suitable for everybody, and might not be the answer if you want to make unplanned withdrawals at short notice. I believe, though, that they merit serious consideration by anyone who wants a medium to long-term investment with predictable returns and a realistic prospect of beating inflation.”
Important note: Past performance is not a guide to the future. The value of investments can fall as well as rise and, although a number of Healthy Investment products come with capital guarantees, these are dependent on members meeting certain conditions so in some circumstances investors may not get back the full value of their original investment.
