Pensioner bonds withdrawn, so what is the alternative?

So what are the alternatives for cautious investors who are uncomfortable with the volatility experienced with shares and want guarantees on their investments?

Well, this week the Government increased the investment limit on premium bonds from £40,000 to £50,000 per person. Premium bonds have the advantage of being guaranteed by the UK Government and any prizes are paid out tax free.

However, while there is a potential of a £1 million pound payout, the average return on premium bonds is just 1.35 per cent. This may be better than what is available from most banks and building societies but still not a great return.

A potential alternative for some cautious investors are the structured deposit plans that are offered by financial institutions from time to time. These products guarantee that capital will be returned at the end of a set time period and the profit depends on a pre-defined set of conditions. An example of a structured deposit currently on sale is one offered by Investec. Investec offer a return of 35.95 per cent after six years provided that the FTSE is higher at the end of the six years than at the start.

This is approximately six per cent per annum. If the FTSE is lower then only the original investment is returned. If Investec can’t afford their guarantees, then financial services compensation applies up to £85,000 per person. These structured deposit accounts can be held inside ISA accounts so any potential return will be exempt from income tax. There are many other structured investments known as ‘structured capital at risk products’, where capital may be lost under certain investment circumstances.

It is important to remember that these capital at risk products do not have any protection from the compensation scheme should the provider be unable to meet their obligations.

David Hill is a Chartered Financial Planner and Independent Investment Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email [email protected] or see www.hillsfinancialplanning.co.uk