At first glance, Shepherds Friendly, a mutual based in Cheshire, has a new – straightforward – market-leading five-year fixed-rate bond.
‘Save for your future with a plan that offers a guaranteed return’, it says, offering a rate of 2.85 per cent a year.
This would make it the highest paying fixed-rate savings account in our independent best buy tables, with a rate 0.1 percentage points higher than Gatehouse Bank’s – the current table-topper.
Shepherds Friendly Society advertises a 5-year fixed-rate bond, which it advertised to This is Money as the ‘highest interest rate on the market for a 5-year fixed-rate savings bond’
After five years, it would have added a ‘guaranteed’ 15.1 per cent to your initial deposit of between £1,000 and £125,000, or so the blurb says.
A deposit of £50,000 would therefore be worth £57,647 after five years, thanks to compounding.
No wonder then, you might think, that Shepherds Friendly emailed This is Money asking why we hadn’t included its ‘market leading five-year savings bond’ in our savings tables.
It also guarantees that ‘100 per cent of your investment’ is covered ‘by the Financial Services Compensation Scheme, with no upper limit’.
Usually, savings deposits with banks savings accounts are protected up to the value of £85,000.
It offers savers the opportunity to deposit up to £125,000 with no upper limit on the cover offered by the UK deposit protection scheme – it also doesn’t say in the ‘what you need to know’ bit that it isn’t a run-of-the-mill savings account
However, the reason why Shepherds Friendly can offer that guarantee is because this five-year fixed-rate bond is actually a ‘life assurance savings plan where your money is invested into a with profits fund’ – once you look into the product information.
The major difference between a life assurance product and a life insurance product is that life insurance covers you for a set term, whereas life assurance covers you for your whole life – this means life assurance premiums can be higher.
However, describing it as life assurance seems peculiar in this case as the product lasts for a five-year fixed term, hence why they marketed themselves to us as a fixed-rate savings bond.
Normally, up to £85,000 of savers’ deposits in a bank or building society is covered
However because the bond is actually a fixed-term life insurance policy, there is no upper limit when it comes to FSCS protection
Under the FSCS, 100 per cent of the value of a long-term insurance policy, like life insurance, is protected if the providing firm fails, higher than FSCS savings account protection.
In the case of this particular product, you are buying a fixed-term life cover policy that guarantees a return after five years of 2.85 per cent annually, rolled up and compounded. You’re also guaranteed back your initial sum.
In order to try and achieve this, savers money is pooled in a ‘with profits’ fund and invested ‘in a mix of equities, government gilts, corporate bonds, property and cash’.
A ‘with profits’ fund is a type of pooled investment fund, in this case managed by mutual insurer Royal London.
According to the Association of British Insurers, investors in a with profits fund are less exposed to rises and falls in the value of their investments due to a process called ‘smoothing’.
Smoothing means customers fund values grow by a regular annual bonus rate, regardless of what is happening to the underlying investment.
The ABI recommends with profits funds ‘should ideally be held for 10 years or more’.
In this case, the annual bonus rate of return is the 2.85 per cent Shepherds Friendly is promising to pay on your savings each year, while the mutual also guarantees you’ll get back 100 per cent of what you invest.
It guarantees this even in what it calls ‘extreme market conditions’.
This is the ‘survival scenario’.
In the death scenario, which means that if the policyholder dies during the five-year term, you get back a slightly different amount.
If you die after one year having invested £10,000, it says you will get back £10,100 after costs. This rises to £10,300 after three years, and £10,500 at five years.
In the product information, Shepherds Friendly comes the bond is a fixed-term life insurance policy invested in a with profits fund invested in a mix of shares, bonds, property and cash
Once you open the investment, you have 30 days within which you can cancel it, before the plan can only be closed in exceptional circumstances – including terminal illness, bankruptcy and insolvency.
This is Money asked Shepherds Friendly how it could guarantee the 2.85 per cent annual return in the event of the underperformance of the fund.
It said that while ‘we can’t guarantee that an investment fund and its asset classes will perform, the customers rate is guaranteed regardless.
‘The society hold the investment risk of the funds invested not the customer. We have used assumptions and calculations to determine the investment return that can be achieved over the period.
‘Capital is guaranteed and is also 100 per cent covered under the Financial Services Compensation Scheme. Interest is payable at the end of the term of the product.
‘Any investment growth above the guaranteed return will be retained by the Society.’