While this amount will be too small for investors with significant cash holdings to take advantage of, what are the alternatives for people looking to park their money?
There is very little that can match the offer from Santander, even after deducting higher rate tax this offer is still 1 per cent better than could be found in the best performing money market fund assuming it was in a tax free wrapper such as an ISA.
This rate is effectively risk free since bank deposits up to £50,000 are guaranteed by the government and as has been learnt the hard way cash funds aren't always as safe as they appear; although if the treasury were forced to bail out Santander we might find that a government guarantee is worth less than it looks.
If you have £2,500 sitting around it may be worth the hassle of changing your bank and mortgage, but given it's only a year's introductory rate most investors are likely to look elsewhere.
The best yield on offer for a similar level of risk is the Wesleyan Cash fund which has a current yield of 2.7 per cent. The fund has a slightly broader mandate than just cash and near cash investments and does dabble in other areas of fixed income slightly.
This additional risk appears well managed and the fund didn’t get caught up in the credit crunch. With a slightly lower yield but better overall performance is the M&G High Interest fund that has made 5.28 per cent for the year to 24 November 2009 although it invests in a range of short-term debt and is far more exotic than a simple cash deposit, while its volatility is relatively low at 3.78 per cent this is at the extreme end for money market funds and far more than the half a per cent displayed by the Wesleyan Cash fund.
Moving away from cash, there are attractive yields on offer in the IMA UK Gilt sector which while having a similar low credit risk do introduce some interest rate risk. For long-term investors this risk is lowered but it remains significant in the short term as any increase in the base rate with reduce capital values.
The Ignis Renfield UK Short Gilt fund currently tops the charts on one year yields offering a current yield of 4.3 per cent. For investors willing to abandon the risk free idea and take on more interest rate risk, the Newton Long Gilt fund is one of the top performers in the IMA UK Gilt sector for one year performance having returned 9.24 per cent. While this astonishing performance is unlikely to be repeated, based on the unique conditions of last year, a yield of 3.87 per cent is still an attractive proposition.
Source: Financial Express Analytics
While sadly Santander’s enticing offer is too limited to be considered a real investment option there are several options that can rival its returns if not perhaps its zero risk. However, when you take into consideration the contracted fall in the interest rate to just one per cent after a year, there are in fact plenty of better options longer term.