5 Year @ 2.25% per annum

NottinghamKnight

Reaper said:

NottinghamKnight said:
Note that the literature states you may be covered by fscs, as to why the state may is unclear

The "may" is standard wording because the FSCS doesn't rule on active savings/investments, it only looks at ones that have failed at which point it decides whether or not it is covered. So, for example, if you look at the wording for a bog standard Barclays deposit or savings account it is says (with my emphasis):

All Barclays Bank UK PLC savings and current accounts are covered by this scheme, so in the event that we were unable to meet our obligations to repay money that you have invested with us, or interest, you may be entitled to compensation.

As far as I can see this product is solidly covered. I'm not sure it should be but I believe it is.

Yes, but covered for what?

Malthusian

Yes, the 2.5% was in error - can't remember if it was a post that was subsequently edited or my own error.

Reaper said:

As far as I can see this product is solidly covered. I'm not sure it should be but I believe it is.

As I understand it - and I am groping in the dark a little - Unity Mutual is subject to the same kind of solvency provisions that prevent banks from advertising 8%pa for 5-year bonds and cleaning up while being underwritten by the UK taxpayer.

This is a long-term insurance product and as such the FSCS cover is unlimited, same as if you had a life insurance policy payout but your life insurer went bust.

Exactly what they do with the money borrowed in this way is unclear; they have withdrawn from the insurance market and currently only appear to offer very expensive investment products (UK index tracker for 1%pa all-in anyone)? So it is reasonable to assume - unless this is the world's most low-key scam as mentioned - that they have enough of an income stream and reserves to virtually guarantee their ability to pay 2.25% interest on capital over five years. I suspect that the bond would be withdrawn fairly quickly if they were inundated with custom and ended up with more money borrowed at 2.25% that they knew what to do with.

dunstonh

My reading of it is that it will have FSCS protection if the provider fails but not if the underlying investments fail.

Reaper

Malthusian said:

Exactly what they do with the money borrowed in this way is unclear; they have withdrawn from the insurance market and currently only appear to offer very expensive investment products (UK index tracker for 1%pa all-in anyone)? So it is reasonable to assume - unless this is the world's most low-key scam as mentioned - that they have enough of an income stream and reserves to virtually guarantee their ability to pay 2.25% interest on capital over five years.

According to their Key Info document it will be invested in their charge free "Unity Mutual Fund" rated at risk 3 out of 7 ("medium-low"). They told This Is Money it is a property portfolio. Obviously they hope the income and growth from the fund will grow more than 2.25%pa in which case they are quids in, if not they make a loss as they have to pay out either way.

EDIT: I may not be quite correct. Their (very similar) Lifetime ISA invests in "Unity Mutual Property Fund" which is what This Is Money were discussing. However this product invests in "Unity Mutual Fund" which is less specific. Given they have the same risk rating I would guess they are similar but we don't know.

grumiofoundation

drphila said:

Reaper said:

Malthusian said:

Exactly what they do with the money borrowed in this way is unclear; they have withdrawn from the insurance market and currently only appear to offer very expensive investment products (UK index tracker for 1%pa all-in anyone)? So it is reasonable to assume - unless this is the world's most low-key scam as mentioned - that they have enough of an income stream and reserves to virtually guarantee their ability to pay 2.25% interest on capital over five years.

According to their Key Info document it will be invested in their charge free "Unity Mutual Fund" rated at risk 3 out of 7 ("medium-low"). They told This Is Money it is a property portfolio. Obviously they hope the income and growth from the fund will grow more than 2.25%pa in which case they are quids in, if not they make a loss as they have to pay out either way.

Do you have a link to the This Is Money article on Unity Mutual's product, please?

There this article i found on their lifetime ISA, which seem to offer similar 'protection'. I couldn't find on guaranteed bond. 

https://www.thisismoney.co.uk/money/saving/article-7655933/Unity-Mutual-touts-Lifetime-Isa-paying-1-50-really-best-buy.html

Malthusian

dunstonh said:

My reading of it is that it will have FSCS protection if the provider fails but not if the underlying investments fail.

If the underlying investment fails the provider has guaranteed to pay 2.25% per year to investors regardless, so I don't see the difference.

Reaper

I gather Friendly Societies are not allowed to offer savings accounts so this is how 2 Friendly Societies have got round the restriction. The rest may start doing it too if it goes well. I think it is a more robust strategy than, say, Castle Trust's Fortress Bonds claim to have FSCS protection.

As for the business model I don't really see a problem with it. After all the banks offer savers fixed interest and invest the money they are given in whatever they hope will be enough to pay the interest and give them a profit on top. We don't question where the money will go before opening a savings account.

On the minus side I don't suppose Friendly Societies have the same compulsory Tier 1 and Tier 2 capital requirements as a bank so if it takes off in a big way I might be concerned at their exposure, but as long as savers are covered by the FSCS that isn't something they need to worry about.

Audaxer

If it is absolutely guaranteed that this is as safe as a 5 year fixed savings account, I don't understand how they can afford to offer 2.25% a year when no others can offer anything near that rate at this time. If it is dependent on the performance of underlying investments, I don't understand how they can guarantee that your 'investment' is 100% safe? 

Delburn

There was a reasonable, but niche, market for these kind of guaranteed income/growth bonds before 2008.  They were mainly offered by "second tier" life assurance companies who wrote mainly protection business and were using their tax position.
After 2008 with the fall in interest rates (and probably also a change in the perceived creditworthiness of smaller banks increasing their relative cost of funding and therefore retail rates) the market dried up.

The underlying investments should be no more relevant than they are to a bank depositor, as Reaper says, or to say an annuity policyholder, or motor insurance policyholder.  The FSCS cover life insurance contracts for 100% of the benefits with no upper limit.  NottinghamKnight may have point that there is a small risk that the product could be found not to be life insurance.  In the past other providers have often offered 101% death benefits etc to eliminate this risk, which Unity have not done.  Seems little risk when Unity are holding it out as life insurance, and the FSCS's current practice is to think up any excuse to pay out.

Here Unity report £322m of Tier 1 capital versus a requirement of only £80m, or a ratio of 401%.
https://www.unitymutual.co.uk/media/1522/oddfellows-solvency-and-financial-condition-report.pdf
This is an exceptionally high ratio, particularly in the context of their policyholder liabilities of around £250m.  This level of capital in relation to liabilities would be unheard of at a bank.  However, you can also see they are choosing to run a lot of market risk from mismatching their assets and liabilities.  By contrast, before Castle Trust converted to a bank they probably had to hold negligible capital, that was only in one minor subsidiary and probably bore no relation to the risks that subsidiary had taken.

I guess the rate is either a stale price, that there is little need to review if they are not getting many applications, or could be a loss leader, if they are a society in decline and want to attract new members. 

ffacoffipawb

Does the "interest" here use up some of your personal savings allowance or is it actually a capital gain?