There is still a huge amount of long-term investment money deposited with
building societies – far in excess of what investors need to cover
emergencies. The problem for investors is that interest rates have fallen
dramatically, with most banks and building societies paying less than 5 per
cent gross on most of their accounts and as low as 1.1 per cent on some
accounts, such as Halifax's Liquid Gold.
However, NDF in conjunction with Abbey National Treasury Services has come
up with a rising income plan with 100 per cent capital security. Income
starts at 6 per cent a year and rises by an amount equivalent to twice or
more of the rise in the yield in the FTSE 100, based on the initial level
of the index.
Over any six-year period, dividends would have risen on average by around
8 per cent a year compound, the lowest rise being 4.1 per cent a year and
the highest rise being 12.9 per cent a year.
Taking a slightly below average rate of 7.5 per cent a year – because
dividend rises over the next year they may well be below average – the
income would rise to 7.8 per cent in the sixth year.
It looks likely that interest rates will remain low for the foreseeable
future, with further cuts likely in the UK as well as in the rest of
Europe. This means building society rates are likely to fall further too.
There is an option for investors to accumulate their income. This would
give them a return of 45.5 per cent assuming a 7.5 per cent growth in
dividends. All these returns are tax-free through an Isa or Pep transfer
and the capital is 100 per cent guaranteed by Abbey National. Commission is
3 per cent.
I see this product as an ideal way for IFAs to help elderly and
ultra-cautious clients with big building society investments to increase
their returns rather than risk reducing them still further.