PORTFOLIO

Savings battle

JOHN BULL

Last week I had a look at unit trust perE formances in a bear market. This time r propose to examine the relative attractions of fixed interest media--national savings, building society deposits, gilt-edged securi- ties and the like—following the significant rise in interest rates even since the Budget. Certainly the National Savings movement has been having a poor time of it. Over the first quarter of the current financial year, although receipts were £15 million higher than they were in the comparable period last year, withdrawals were nearly £100 million up. After taking interest payments into account, the total outstanding is £60 million down in the three months at £8.550 million. In fact the National Savings move- ment retains some attractions, though these, such as they are, do not shine sufficiently brightly in the hard battle for savings now being waged (one unit trust group spends well over £1 million a year on advertising). The introduction of Save-as-you-earn (SAYE) should improve the image.

Consider, first of all, the saver who wants a high running return and pays tax at the standard rate. National Savings certificates and the SAYE scheme both provide deferred returns, so the best National Savings medium in this case is the 7 per cent British Savings Bond. Running yield is, as indicated, 7 per cent and the small tax free bonus available after five years takes the annual rate up to 7.63 per cent. At the moment, however, building societies can do better than this, providing a grossed-up return of 81 per cent. The trouble is that whereas the British Savings Bond coupon is fixed, the rate of interest on building society deposit is not (you need a subscription share to achieve that). So if you think that interest rates could fall sharply over the next five years, there would be a case for preferring the Savings Bond to the building society deposit. Better, though, are the returns available on deposits lodged with your borough treasurer.

At the moment, provided you shop around, you should be able to obtain 81 per cent on deposits lodged for one month, 81 per cent for three months' money, 9 per cent for six months, 91 to 91 per cent for one year and 91 to 94 per cent for five years.

As for the gilt-edged market, there are some highly attractive flat (rather than redemption) yields to be had. Funding 61 per cent 1985-87 provides a flat yield of 84 per cent at £751. Funding 6 per cent 1993 at £691 gives you a running yield of between 81 and 9 per cent. Treasury 61 per cent 1995-98 at £741 provides a running

return of fractionally under 91 per cent. And the irredeemable stocks (like War Loan and Consols) show running yields in the tange 94 to 91 per cent. It is important to be clear about these gilt-edged returns. Because I have in mind the person who wants a high annual return rather than a deferred return I have not quoted here redemption yields (which take into account the fact that these stocks are redeemed at par and so pros ide a tax free capital gain for today's purchasers). Second. the high yields have to be balanced against the fact

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that gilt-edged prices, even at the low levels now attained, can easily go lower before they reach redemption. Likewise, if interest rates were to fall rapidly, some of these stocks might even go above par. In this category I myself would choose a six months' local authority deposit (9 per cent) as offering just about the best value for money at the moment.

The second case to consider is the person who wants the highest possible return on his money and is prepared to wait for it (and pays tax at the standard rate). Here the clear winner is the Save-as-you-earn scheme. So great is the tax free bonus available at the end of five years (it is even greater at the end of seven years) that the grossed—up return over the period of scheme adds up to 12 per cent per annum (12.5 per cent if con- tinued for seven rather than five years). National Savings Certificates (twelfth issue) fall well behind with 7-63 per cent per annum over five years. In fact the other place to look at under this heading is the gilt-edged market. Redemption yields (to be distinguished from the running yields I described earlier) grossed up to take account of the fact that capital gains are now tax free reach just over 12 per cent per annum in a number of cases—Savings Bonds 1965- 75 for instance (12.05 per cent).

The third kind of person I have in mind pays little or no tax. Here the main con- sideration is to find savings media which pay interest gross, or where interest is paid net and tax can be reclaimed. Building Society interest, for instance, is paid net and interest cannot be reclaimed. The effec- tive yield on building society deposits to the non-tax payer is, therefore, only 5 per cent. Local authorities, on the other hand, pay interest net but tax can be reclaimed. There- fore any local authority deposit is better than a building society deposit for non-tax payers.

In the case of National Savings Certi- ficates, where the tax free bonus is relatively large, non-tax payers are not par- ticularly well placed. The twelfth issue of certificates only provides a net yield of 4.56 per cent. Savings Bonds provide a net yield to the non-tax payer of 7.36 per cent com- pared with an equivalent 7.63 per cent to the standard tax payer. Save-as-you-earn pro- vides an annual 7 per cent net if the scheme is followed for five years.

These are complicated matters. I would sum them up by saying that local authority deposits provide the best haven for savings wanting high immediate income, whatever their tax bracket. For those prepared to wait, Save-as-you-earn is outstanding.

I return to my two portfolios next week.

Valuations at 7 July 1969

First portfolio £6.183 (details next week) Second portfolio

600 Pillar Holdings at 16s 9d £502 15 Kaiser Steel at £40 4s .. £603

250 Lonrho at 53s 6d f£764609 100 British Petroleum at 148s

300 Vosper at 22s .. £330 1,000 Allied Breweries at 15s 71d £781 300 J. Bibby at 22s 6d ... £338 100 Burmah Oil at 106s .. £530 Cash in hand .. £915 £5,408

Deduct: expenses £185

Total £5,223