As every saver knows, the rate of interest payable on deposit accounts remains very low and even though short-term rates have been showing some signs of increasing to attract investors, there is still little to get excited about; but could you do better?
From a comparative website this week, looking at Sterling based accounts, the best instant access deposit rates are currently paying gross interest of between 2.5% and 3.25% but be careful, some of these are based on having a first year only bonus included in the rate.
A 3 year fixed rate bond is currently showing 3.75% and longer-term bonds of 5 years are paying 4.2%. The common problem with all of these for taxpayers is that tax will be due on the interest with an income tax starting rate in Spain of 24.75%, which compares with the UK at 20%. A 3.25% variable rate becomes 2.44% net of 24.75% tax and even 4.2% drops to just 3.16% net.
A better way could be to consider using an alternative type of investment, offered by a few international insurance companies; these are often referred to as offshore investment bonds. These bonds will not only open the way to a very wide range of investment funds with different levels of risk to choose from, they also have a positive impact on the tax payable both in terms of the amount and the timing.
Whilst you could select a fund or number of funds which are linked directly to the open market, for the more risk averse, there are other options which are designed to smooth out the effect of daily market movements and provide a more steady rate of return.
The combination of smoothed returns with better tax efficiency can make quite a difference to the net result.
Taking one such fund as an example, which has an anticipated gross rate of return of 7% per annum. This is a cautious fund but because it is accessed through an investment bond, there is a layer of charges to take into account. Based on an investment of 25,000 (either Euros or £ Sterling), the average charges over a 10-year investment period amount to around 2% pa. This has
the effect of reducing the 7% annual bonus declaration to something like 5% pa net of charges.
This would see the 25,000 grow over 10 years to 40,700 if no withdrawals are made, which compares with a net return from the best of the deposit accounts illustrated of 34,123, assuming 24.75% tax is paid. If as an alternative, the interest is taken as income from an instant access deposit account, this would amount to a total something like 8,125 gross over 10 years or 6,114 after tax at 24.75%. The bond in this example however could have produced 12,500 gross income over the same period. Because of the way that bond income is taxed, the net amount received would have been approximately 11,800 almost double that
received from the deposit account!
Whether your search is for growth or income, this is just one example of how alternatives to deposit accounts might just serve you better.