Savers looking for the best interest rates on their money risk being sold unsuitable investments by banks and building societies
Savers looking to get the best interest rates on savings risk being sold risky, unsuitable investments by banks and building societies offering “tied” deals. These deals offer market leading interest rates on cash deposits but are only available if the saver puts an equal amount into an investment product.
Yorkshire Building Society is offering 6% on cash deposited in its Combination Bond. You only get the 6% on the cash deposit if you invest an equal amount in an investment bond from Legal & General. Investment Bonds can rise and fall in value putting the saver at risk of losing money if the investment performs badly.
Adrian Shandley, head of Premier Wealth Management commented “I think it is unethical to sell these products. It is not ethical to make the availability of one product conditional on buying another – it leads to the customer having a product they probably wouldn’t otherwise buy and might not be suitable for them.
Investors may want just risk-free returns such as from a cash Isa, but suddenly find themselves with a product that could lose them money.”
Mr Shandley added that selling combinations of products such as endowments with mortgages and payment protection insurance with loans had always led to problems in the past.
With Investment Bonds, tax is paid on gains within the product, rather than by the taxpayer, so non-taxpayers effectively end up paying tax anyway, while basic-rate taxpayers cannot use their annual capital gains tax allowance to cut their tax bill.
Mr Shandley continued “I’ve heard that the Financial Services Authority is unhappy about the way these bonds are sold. I would not recommend them to individuals except in special circumstances, such as inheritance tax planning. For the vast majority, investment bonds are almost guaranteed to be inefficient from a tax point of view,”
Ian Lowes, of Lowes Financial Management, said: “I have yet to find one of these tied deals that I consider good value. Some of the headline rates on cash deposits are bound to be enticing to people, but the other half of the deal may not be suitable for them.”
If you don’t take this risk and put your money into an ISA without a tied investment you will be looking at an interest rate of around 3.2%. With inflation currently at 3.4% you would actually be losing money in real terms.
This coupled with a new report by MGM Advantage, suggesting the average household needs a pension pot of £564,227 to cover the cost of the first 20 years of retirement does not paint a pretty picture for savers or those who are concerned about their pension provision.
What are you doing to secure your future financial security?
