Question
Justin, do you think the RBS Exchange Traded Bonds being advertised at the moment are attractive compared with fixed interest savings products?
I am looking after the savings of a 97 year old lady, and constantly moving money from one bank to another to get reasonable rates is becoming troublesome.Answer
On the surface they look attractive compared to savings accounts, with interest rates of 3.9% a year being quoted and the potential to rise with either interest rates or inflation in future.
However, there is a fundamental difference, RBS Exchange Traded Bonds are effectively corporate bonds issued by RBS with a 12 year term. This means 3 major differences to a conventional savings account:
1. Whether you receive the interest payments and your money back at maturity depends on whether RBS can afford to pay you (you'll be behind savings account holders in the queue).
2. If RBS can't afford to pay you and you lose money you won't be covered by the Financial Services Compensation Scheme (FSCS).
3. If you sell the bonds on the open market at any point before maturity you may get back more or less than your initial investment, depending on their price.
The bonds themselves are interesting in that the rate of interest is not fixed. There are 2 variations: the Floating Rate Bond promises to pay the higher of 3.9% and the 3 month LIBOR rate (usually similar to the Bank of England Base Rate) a year, while the Index-Linked Bond pays the higher of 3.9% and inflation measured by the Retail Price Index (RPI).
A link to interest rates or inflation is appealing as it removes one of the big influences on bond prices, which should help reduce risk. But whether you choose the floating rate or index-linked bond, you'll still be vulnerable to higher inflation and interest rates respectively. Plus RBS's financial position, which remains volatile, is likely to have a heavy influence on bond prices between now and maturity.
I'll try and take a closer look at these bonds later this week and write a full review. But to answer your question regarding their suitability as a savings account alternative for a 97 year old, I'd say no, not very suitable.
If she needs to access the money in an emergency she might end up having to sell at a loss if the price at that time is lower than the one she paid. And should she pass away before maturity then the shares may have to be sold, again, possibly at a loss depending on prices at that time.
I know rates paid on savings accounts generally look rather unappealing in this low interest rate climate, but they're probably the most appropriate home for a 97 year old's money as it's not the time in life to be taking any risk. To avoid the hassle of having to periodically move money between banks to ensure a competitive rate you could consider a 4 or 5 year fixed rate account, where rates of around 4 - 4.5% a year are currently on offer. There may be penalties for withdrawals before maturity, but these wouldn't normally apply in the event of death - it's worth checking the relevant terms and conditions re: both before opening an account.
Hope this helps.
Justin, do you think the RBS Exchange Traded Bonds being advertised at the moment are attractive compared with fixed interest savings products?
I am looking after the savings of a 97 year old lady, and constantly moving money from one bank to another to get reasonable rates is becoming troublesome.Answer
On the surface they look attractive compared to savings accounts, with interest rates of 3.9% a year being quoted and the potential to rise with either interest rates or inflation in future.
However, there is a fundamental difference, RBS Exchange Traded Bonds are effectively corporate bonds issued by RBS with a 12 year term. This means 3 major differences to a conventional savings account:
1. Whether you receive the interest payments and your money back at maturity depends on whether RBS can afford to pay you (you'll be behind savings account holders in the queue).
2. If RBS can't afford to pay you and you lose money you won't be covered by the Financial Services Compensation Scheme (FSCS).
3. If you sell the bonds on the open market at any point before maturity you may get back more or less than your initial investment, depending on their price.
The bonds themselves are interesting in that the rate of interest is not fixed. There are 2 variations: the Floating Rate Bond promises to pay the higher of 3.9% and the 3 month LIBOR rate (usually similar to the Bank of England Base Rate) a year, while the Index-Linked Bond pays the higher of 3.9% and inflation measured by the Retail Price Index (RPI).
A link to interest rates or inflation is appealing as it removes one of the big influences on bond prices, which should help reduce risk. But whether you choose the floating rate or index-linked bond, you'll still be vulnerable to higher inflation and interest rates respectively. Plus RBS's financial position, which remains volatile, is likely to have a heavy influence on bond prices between now and maturity.
I'll try and take a closer look at these bonds later this week and write a full review. But to answer your question regarding their suitability as a savings account alternative for a 97 year old, I'd say no, not very suitable.
If she needs to access the money in an emergency she might end up having to sell at a loss if the price at that time is lower than the one she paid. And should she pass away before maturity then the shares may have to be sold, again, possibly at a loss depending on prices at that time.
I know rates paid on savings accounts generally look rather unappealing in this low interest rate climate, but they're probably the most appropriate home for a 97 year old's money as it's not the time in life to be taking any risk. To avoid the hassle of having to periodically move money between banks to ensure a competitive rate you could consider a 4 or 5 year fixed rate account, where rates of around 4 - 4.5% a year are currently on offer. There may be penalties for withdrawals before maturity, but these wouldn't normally apply in the event of death - it's worth checking the relevant terms and conditions re: both before opening an account.
Hope this helps.
Read this Q and A at http://www.candidmoney.com/questions/question329.aspx
No comments:
Post a Comment