17th July 2013
UK fixed rate bond investors face a £1bn shortfall in returns if they roll over their savings into today’s best buy products because of the drop in rates according to research from HSBC.
The analysis shows that rates on some products have fallen significantly – up to 2.47% on some products. Almost 5.3 million fixed rate products worth nearly £93 billion will mature in 2013 with the largest number due to mature in November or some 568,455.
Of these products, 2.8 million have matured over the last six months, but the recent fall in rates means bondholders face a £1 billion fall in income if they reinvest their savings pot into similar products.
All fixed rate products have been affected by the drop in rates and now offer lower returns if savers were to reinvest their money into the best-buy products currently available. However, the biggest falls in income will be felt by 3, 5 and 2 year bond holders with eye-watering falls of 52%, 50% and 45% respectively says the bank. It says that last year, holders of one year and 18 month bonds saw a slight rise in income, however even these product holders can now expect a fall in income of 39% and 38% respectively HSBC says the smallest fall in income will be felt by 6 month bond holders, but at 12% this drop will still have a significant impact. As well as the biggest drop in overall income, holders of 3 year bonds will suffer the biggest drop in individual income. The average investment in these bonds currently stands at £22,333 and if this were to be reinvested in the current best-buy products on offer, investors can expect a return of £3,037 – a fall of £1,576 compared to their last investment in 3 year bonds.
HSBC says the fall in income across all fixed rate products is a result of a drop in average best-buy AERs available. It says the falls vary from 0.16% for 6 month bonds to 2.47% for 5 year bonds. Despite longer term bonds suffering the biggest falls in AERs, these products still offer higher rates than the shorter term investment options.
For those investors in the 3.1 million fixed rate products due to mature over the remainder of 2013 – particularly those 2, 3 and 5 year bonds in July and November (see graph below) – HSBC recommends that people seriously consider what the best possible home for their savings is.
Bruno Genovese, head of savings at HSBC, says: “As an increase in interest rates continues to look further into the distance, the knock on downward pressure being applied to saving rates is affecting the incomes of investors.
“Many savers value the guaranteed income and security offered by fixed rate products. However, those who want to reinvest their savings from matured fixed rate products into comparable deals this year may find that their income drops significantly. Savers need to consider all available options and this may not be to simply reinvest their savings in a similar product.
“Diversifying savings portfolios to have a variety of products can ensure that investors lessen the impact of falling interest rates. At HSBC, we can offer a range of options which offer a more stable way to invest for long-term growth.”