So it’s frustrating when we can see we’re not getting our fair share… Whether that’s your best pal’s cake or your bank’s interest rate!
If you’re trying to find the best interest rates and you’ve been keeping track of recent rate changes, you’ll know that banks and building societies have been slow to pass on increases in the Bank of England base rate to savers.
The situation has been so bad that the Financial Conduct Authority (FCA) issued an action plan to try and ensure better deals are made available.
With the Plum money-saving and investment app, we already provide options to help you increase the amount you save and diversify your investments. And now we have a new, low-risk way to earn a high yield on your cash (compared with a traditional easy-access account from a high-street bank).
Welcome to Plum Interest, where you can earn 5.00% on your cash (with a higher rate of 5.15% available for Plum Premium subscribers).
*VAR (Variable Annual Rate) projection correct as at 20/11/23. The projected return is shown after fees (net). For more on fees, see the ‘What are the fees for Plum Interest?’ section below. A projection is not a reliable indicator of future performance. Returns are not guaranteed. Plum is not a bank. Comparison made versus a high-street bank current account.
What is Plum Interest?
Any money held in a Plum Interest pocket is invested in a short-term type of mutual fund known as a Money Market Fund (MMF).
A mutual fund is a diversified investment portfolio that is professionally managed and compiled around a certain theme. A fund will contain many stocks (a fraction of a company) and/or bonds (corporate/government loans).
Our Plum Interest MMF only contains high-quality investments, like interest-generating government bonds. The aim is to deliver a better variable rate than one you might expect to receive in a current account from a high-street bank from a low-risk investment fund.
The types of low-risk money market instruments contained include:
Certificates of deposits
A bank-issued savings certificate that earns interest on a lump sum for a fixed period of time (with short-term maturity).
Commercial papers (corporate bonds)
An unsecured, short-term debt instrument issued by corporations to finance short-term expenses e.g. the payroll for their staff.
UK Government bonds
Known as treasury bills in the US, government securities are called gilts in the UK. They’re an investment vehicle that delivers a fixed return until expiry.
How does Plum Interest work?
When you pay money into Plum Interest it will be used to buy shares of a Constant Net Asset Value (CNV) Money Market Fund (MMF).
The money market is the trade in short-term assets between banks and other financial institutions. This includes overnight swaps of vast amounts of money between banks and the UK Government to generate liquidity.
Public Debt CNAV invests at least 99.5% of its total fund in cash, government securities and repurchase agreements backed by the Government. CNAV MMFs must invest in government securities like fixed-rate bonds and transact at a constant price (i.e. dealing CNAV of £1.00 per unit).
For borrowers, like banks, brokers/dealers, hedge funds, and nonfinancial corporations, the money market provides low-cost access to money.
For investors (e.g. banks, money managers, and pension funds), the money market is a means for dependable (low-risk), liquid, short-term investments.
What are the benefits of Plum Interest?
The main benefit of Plum Interest is that it aims to track the Bank of England base rate. So it’ll typically yield a higher return than you might expect to receive in a current account from a high-street bank. And it should still be competitive versus some easy-access savings account interest rates.
It contains low-risk investments, because it only includes robust companies and governments, meaning they are among some of the safest available.
In addition, only short-term assets are selected (gilts, cash deposits), reducing uncertainty and increasing stability. The shorter the time the bond debt is, the lower the risk that something could go wrong in the interim.
Finally, holding your money in an MMF is more diversified than having all your holdings at one bank. Given that the Financial Services Compensation Scheme (FSCS) only protects individuals up to a maximum of £85,000 per banking group, this could be worth considering for individuals holding a large balance, for a temporary period.
What are the risks to investors?
Although Plum Interest can be considered amongst the safest investments available, there is still an inherent element of uncertainty when investing.
The fund composition removes much of the risk, compared to trading company shares on the stock market, for example. However, potential investors should consider the following:
The most immediate risk is a fall in the value of the underlying investment and therefore the capital that is invested. Alternatively, if the CNAV (or total assets minus liabilities) falls below £1 (see ‘How does Plum Interest work?’ section above), the return would be considered lower than expected.
Money Market Funds (MMFs) came under strain in March 2020, during the financial market sell-off triggered by the first Covid-19 lockdown. In that instance, there was a struggle to match buyers with sellers, but MMFs still provided good liquidity, versus other types of investment options.
Interest rate risk
The Bank of England may start cutting their base rate, or not raising it as quickly as recently. This could happen if inflation is under control, or if there are fears of recession in the economy. MMFs are sensitive to this, and negative interest rates could pose a particular problem.
Income may fall, cease or not rise as expected. Although only high-quality investments are selected for inclusion in the low-risk fund, income could be jeopardised if e.g. the Government or corporation can’t pay back the debt that was initially financed with bonds.
Over the longer term, the return delivered could be lower than inflation. MMFs are intended to provide a short-term investment option. In this context, anything less than around 5 years can be considered ‘short-term’. For long-term options, a different investment option may be more appropriate.
What are the fees for Plum Interest?
If you contribute money by adding it to your Plum Interest Pocket, you’ll be charged a yearly fee, based on the daily balance that you hold in the fund.
For Premium subscribers, this annual fee is just 0.10%, because we waive our usual 0.15% service charge, but for all other customers this total annual fee is 0.25%.
The remaining 0.10%, which all customers pay (including Premium subscribers), is the fund management fee for BlackRock. The fund value is automatically updated to reflect BlackRock’s fee, so you won’t see it as a separate charge.
Where applicable, Plum’s service charge fee is collected from your Primary Pocket on the first day of each calendar month.
Learn more about fees for investing with Plum.
How can I use Plum Interest?
There are no subscription fees for Plum Interest. It’s available to all customers using the Basic (free) version of the Plum app.
First, you need to download and install the app on your phone. And once you’ve created your account you can get started by tapping on the Plum Interest tile, from the ‘Save’ section of the app.
You can then deposit money into your Plum Interest Pocket to earn a bank-beating return that’s backed by the Government.
If you decide to withdraw your money, we’ll arrange an investment sell order on your behalf that executes at 9:30 am (UK time) on the first available working day (so orders placed before this time will execute the same day).
Your capital is at risk if you invest and you could lose money.
Plum is regulated by the Financial Conduct Authority (FCA).
You shouldn’t invest or use any financial product unless you understand its nature and your exposure to risk. If you choose to invest you should be satisfied your investment strategy is suitable for you and your circumstances. Conduct your own due diligence or consult a licensed financial advisor or broker before making an investment decision.
Learn more about the Plum money management app by visiting our website.Download Plum