ISA Rip Offs Costing Us a Fortune!

On 6th April The Sunday Times ran two articles in the Money section that should have made savers both furious and despairing at the same time. This article went to the heart of the problems faced by careful savers in this 'new world' of low interest rates.

Here's the problem...

For many years savers have been able to rely on interest on fixed rate deposits of typically 4%-6%. Not good, but if you had £100,000 stashed away at least it provided an income of a few hundred pounds a month.

Those days have gone, at least for the next few years.

ISA Investment Proves A Disaster

The Government scheme to provide tax free savings through ISA's has been a disaster. There are three problems:

Delays in transferring money from one ISA to another - it can take weeks or even months.
Lack of clarity over rates on old ISA products
'Bait and switch' rates where introductory offers then change into derisory returns.

For example, First Direct's market leading 3.2% rate changes to just 0.2% after the initial higher rate ends. That earns you just £200 per year on a £100,000 investment! Scary.

No wonder savers are both angry and bewildered. At best they can get around 2.5% pa long term and even that is difficult and may require continual juggling of accounts. An average of 1% is more realistic if you don't want to be switching accounts every moment that your 'introductory rate' ends.

Corporate Bonds Have Hidden Sting

So what are savers to do? The second article in the Sunday Times deals with that question with the headline "Rush for income could spark the next scandal".

This article deals with the increasing sales activity around corporate bonds. Currently offering 6%-7% pa they appear to be an attractive alternative to traditional savings in banks and building societies. But the investment is more complicated than it seems. Corporate bonds are traded on the market, and as base interest rates rise, the capital value of the bond can fall!

So whilst investors may get the interest rate they wish, if they need to recoup their capital they may get less back than they invested. That's not good. In fact we think it's terrible. What's more this aspect of corporate bond investment is often hidden in the small print so that investors don't realise it could happen to them. Hence the Sunday Times referring to the "next scandal".

Given this awful situation what are savers to do? Could property provide an answer?

To get to a 'yes' answer investors have to be satisfied that property will provide a significantly better investment return than leaving your money in a savings account.

Income from UK Property

With the focus on returns for savers, we are going to focus on what we see as the highest available income property currently available in the UK - that's MultiLet and HMO property in specialist market sectors.

Axis have property here that returns up to 10% NET pa, after all management costs but before mortgage interest. If you have £100 - £150K of available capital then you can invest outright, and achieve an annual return of c. 10% net on your money.

If you are currently achieving 2% in a savings account, that's a 500% improvement. Worthwhile? We think so.

And then there's the potential capital gain as the property cycle turns and your investment, purchased at the bottom of the market, increases in value.

Finally we should point out that the investment income is fully guaranteed by a government appointed Agency who also fully manages the property.

To sum up: 10% net guaranteed income, plus good growth prospects, backed by bricks and mortar.

Income from USA Property

If you want to achieve even higher income from your savings, then look to the USA. We can offer you property in two separate US locations, one offering 15%+ net income after costs, the other 20%+ rental income after costs.

In this case your improvement on your UK savings income will be between 700% and 1,000% depending on which location you choose. The rental is not guaranteed, but experience shows us that voids are rare in US property and tenants tend to stay a long time if the property is maintained.

Again you have the prospect of capital growth.

What's Your Verdict?

Maybe 2% income from a savings account, with the reality of losing money after inflation every year. Or maybe a capital bond with 6-7% yield but the real chance of a capital loss?

Or maybe it's time to consider property as an investment, at least for part of your cash savings. With net rental income to 20% pa, you could actually pay for your property outrights in five years! Then we can offer guaranteed rental income on some investments, and the prospect of capital growth because you purchase at the right time in the property cycle.

Not much of a contest, is it?