Nationwide is offering a new, top rate fixed rate savings bond to consumers – but only if you are willing to put half of your money into a structured deposit that relies on the stock market performance to provide a rate of return.
Its new one and three year Combination Savings Bonds pay out 3.25% per annum and 4.10% per annum respectively.
But in order to get this great rate for your savings, you need to invest the same amount or more (and a minimum of £3,000) into Nationwide’s Protected Equity Bond, which offers a return linked to the performance of three of the world’s largest stock market indices, for six years.
How does Nationwide’s structured deposit work?
The product is designed to you a chance to get some exposure to stock markets without the risk of losing all of your money. Effectively, your savings are held on deposit by Nationwide, not invested in company shares or investment funds, for six years.
The managers of the plan, Legal & General, record the starting level of the three indices – the FTSE 100, EuroSTOXX and S&P 500 – then in the sixth year of the plan, record the closing level of each index for each business day to create an average return for that final year.
The percentage change between the starting level and closing average level of each index is then calculated, added together and divided by three to give you an average index growth. The plan will pay you 100% of this growth up to a maximum return of 55% of your original investment.
What does that mean for your savings?
In essence, it means that if the indices rise by by 100% (i.e. double in value), you will get back a maximum of 55% of your total investment along with your original investment, equivalent to 7.57% per annum. So if you invested £3,000 in this scenario, at the end of six years you would get your original investment back plus £1,650.
If the stock markets have fallen in this six year window or two have fallen more than one has grown, however, you don’t get any return at all. But no matter what happens, you will always get your original capital back.
Are the stock market returns realistically achievable?
We put the mathematics of the product to the test. We analysed the three stock market indices and back tested them to see what kind of realistic returns would have been achieved in the past.
If you had invested £3,000 in the product on 25th August six years ago (starting in 2004), you would have got a return of £3,150, a paltry 0.85% per annum, in 2010. If you had invested six months prior to that, you would not have had any return at all, the same as if you had invested in August 2003, with the plan maturing in 2009.
It is only when stock market levels have been very low at the outset that decent returns can be achieved. If you had invested in the plan in August 2002, when the internet bubble burst and stock markets tumbled, for example, you would have got an annual interest rate of 6.88%.
Yet in August 2002, you could get a five year fixed rate savings bond, with no dependence on stock market performance, which paid 5.60%.
Which? Money investment expert Gareth Shaw said: ‘In a low interest environment, more and more people are looking for ways to get a better rate for their savings and these kind of structured deposit accounts are becoming increasingly prevalent.
‘If you are an extremely cautious person, and do not want to take any risk with your savings, you may think that with no risk of losses and a guaranteed decent rate for half of your savings, this might be a good bet.
‘But as we have shown, the headline rates are not guaranteed to be delivered and if you don’t make any return at all from the stock market, your savings are still at risk – from inflation. And if it’s the market leading savings bond you’re after, you could get a better rate from the ICICI three year fixed rate bond, currently paying 4.15%.
‘This could be a good way to take a tentative step towards the stock market without actually placing any of your money at risk – but always remember that inflation can erode the real value of your savings if the stock markets underperform.
‘Finally, you must remember that your money will be locked away for six years if you invest in the product, which you cannot access in any circumstances. If you want to know you can access cash, do not invest in this product.’
Read our latest advice guide on Structured Products for more information and look out for the December edition of Which? Money for a deeper analysis of these products.
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