Bonds are the punters' favourite

News Analysis: Low interest rates are pushing record numbers of savers away from deposit accounts and into stock market-related investments

EVIDENCE THAT British savers are engaged in a massive switch of funds away from low-interest deposit accounts began to mount up yesterday when investment firms reported unprecedented sales of share-based products.

Norwich Union, one of the largest life insurers, reported record sales of lump-sum investment bonds in the first three months of 1999. Sales of the bonds, which allow savers to participate in the stock market while reducing their risk, more than doubled to pounds 164m.

Earlier this month, Axa Sun Life reported a similarly spectacular jump, with sales of lump sum bonds up 109 per cent to pounds 435.5m. Friends Provident, another life insurer, reported a 64 per cent leap in sales.

The results signal a quiet but highly significant boom in share-based investments on a scale which rivals the boom in Personal Equity Plans in the first quarter of this year.

Both Norwich Union, led by chief executive Richard Harvey, and Axa Sun Life attribute the boom to the tiny returns now available on deposit accounts. Hundreds of thousands of investors, most of them retired, depend on getting a high rate of interest on their savings to supplement their income.

In the last two years alone, savings rates have followed mortgage rates in plummeting to their lowest level since the 1960s. Save pounds 10,000, lock it up for 90 days, and one of the best interest rates available is from the Alliance & Leicester - just 5.25 per cent. Put it on instant access and the rates barely beat inflation - the Midland Bank's instant access rate is just 2.75 per cent.

Ned Cazalet, a leading expert on the investment industry at Cazalet Financial Consulting, said: "There is an awful lot of money sitting in the accounts of building societies earning less than 3 per cent. Since the exit from the Exchange Rate Mechanism in 1992 the psychology has remained that you can get interest rates of 10 per cent. But most people don't continually check these things: it's only now that people are properly waking up to just how low they have got."

Appaled by the rates, savers are beginning to shift into two types of lump-sum investment bond. With-profits bonds, based on the bonuses dolled out every year from life insurers' funds, typically offer 6 or 7 per cent. There is also a multi-billion pound trade in equity bonds - derivatives- based products that offer to imitate the stock market while protecting against a crash.

Ken Raynor, an investment expert at Bradford & Bingley, one of the country's largest independent financial advisers, says: "More than 40 per cent of investors are looking for income rather than growth from their savings and there is a definite move to creating more income. People's perspectives are changing as their income from traditional places reduces."

But there is a flip-side to the boom. Independent financial advisers warn that savers must avoid rushing away from deposits without realising exactly what they are losing - the fact that in a deposit account, their capital is guaranteed.

"People need to be careful about this. When they see annual bonuses of 6 or 7 per cent they need to realise that it is not the same thing as interest rates. There's a risk to their capital involved," says Mr Raynor.

Industry observers fear another worrying trend may be at work among the people who sell the products, financial advisers. The fear is that advisers are selling them in such quantities only because they are afraid to sell their normal core products - pensions.

The Financial Services Authority (FSA), the City regulator, recently issued guidance to advisers on personal pensions. The guidance can only be ignored at the risk of losing the right to work in financial services. It warned advisers against selling pension products with high up-front charges.

The guidance stemmed from the authority's concern about stakeholder pensions, the Government's much-cherished scheme for encouraging retirement saving.

The FSA was worried that people would switch out of personal pensions to stakeholder pensions after a couple of years, getting bad value for money for their early contributions and drawing accusations of mis-selling.

The fear is that the regulator has taken a sledgehammer to crack a nut. By warning against selling pensions with upfront charges, the FSA is effectively warning advisers away from most types of personal pension. Without high upfront charges, there is usually no high upfront commission.

Afraid of selling pensions - the bread and butter of a typical high street IFA - advisers are now concentrating on investment business - and bonds are one type of product that still pays a high commission.

Les Owen, chief executive of Axa Sun Life, is warning that ultimately this could defeat the Government's aim of selling more pensions, causing a "pensions blight". Financial advisers, for now, feel safer selling investment bonds.