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How to invest £1 million safely?

Saving | Savings Accounts Helpful? 13

Asked by webstercharles, submitted 31 August 2010.

Open Quote I have £1m. to put into an Income Bond for up to 6 years but I want absolute security that I won't lose my capital or not receive par value at term. I want to keep my funds here in the UK. Can you suggest any viable bank or institution. I know Barclays used to run one, which paid 0.53% per month for 6 years.

I even thought of Gilts but am not sure that I understand how to calculate the Redemption Yield, so if you could show the actual returns on £1m that would also be appreciated.
End Quote

Answered by Justin on 31 August 2010

The simplest option would be to use a bank or building society fixed rate savings account.

But the longest term I’m aware of is currently five years and you’ll only be covered by the Financial Services Compensation Scheme (FSCS) up to £50,000 per institution.

The chances of a large bank going bust are slim, but if you want absolute security you’ll need to ensure your savings are fully covered by the FSCS, which means holding accounts with 20 or more institutions on £1 million of savings (i.e. £50,000 x 20).

I’d suggest using to view the current ‘best buy’ rates available on five year fixed rate bonds. At the time of writing these were around 4.75% gross although if you open accounts across a number of institutions (to benefit from FSCS cover) the average rate earned will be rather less than this (probably under 4%) – particularly as the best rates are seldom paid by the largest, most robust, institutions.

Perhaps also consider combining with easy access savings accounts, providing both access to some of your money should you need it and to act as a hedge against the possibility of rising interest rates, but even ‘best buy’ rates are currently low at around 2.5% or less (ignoring accounts with tempoarary introductory bonuses).

Gilts offer the advantage of being fully backed by the Government, but are more complex and don’t look great value at present versus fixed rate savings accounts.

At the time of writing a gilt paying interest (called ‘coupon’) of 4% and redeeming in September 2016 is trading at £110.81. This means you buy the gilt at £110.81 now, receive annual income of £4 (paid in two six monthly instalments) and receive £100 back in September 2016.

On the surface this looks a pretty bad deal because you’ll lose money, although in theory an attractive rate of interest meanwhile should compensate. The combination of the interest received and any loss/gain at redemption can be combined into a ‘redemption yield’ figure, which shows the equivalent rate of interest. In the above example the redemption yield is 2.08% - not very attractive versus the fixed rate savings accounts.

Putting this example in the context of £1 million:

Your £1 million would buy 9,024 gilts at 110.81p. Each gilt pays £4 annual interest totalling £36,096 a year for six years. In September 2016 you’ll receive £100 for each of your gilts, totalling £902,400 – a £97,600 loss. Bear in mind that if you sell gilts prior to redemption you may receive more or less than £100 per gilt depending on what the market will pay for it (largely depends on interest rate and inflationary expectations).

I know this all seems a bit grim, but it’s a sad reflection of how difficult the current climate is for savers, especially those with larger sums where ensuring full FSCS cover is especially important.

Good luck whatever you decide.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (2) - To post a comment please register or login .

Comment by sealover at 11:28am on 11 Sep 2010:

Justin, Could you advise whether gains on ordinary gilts are subject to Capital Gains or offsettable against gains?

Comment by justin at 11:36am on 13 Sep 2010:

Hi sealover, gains on gilts are exempt from capital gains tax, but this also means losses cannot be offset against other gains.