Income generation in a low interest rate environment
The seemingly never ending decline in interest rates makes the search for income ever challenging. What can an income hungry investor do? There are several options which could potentially pay far more than you will get from savings accounts, though they all have their drawbacks. Here are just a few:
Special bank accounts
To attract new customers banks and building societies offer enticing “teaser” rates up to about 3.5%. They usually limit the amount which can be deposited, with the special rate only payable for a limited time and often come with other conditions e.g. setting up a current account. A reasonable return can be achieved, with no risk to the capital, which is suitable for the more risk averse.
Peer-to-peer lending
Involves lending your money to strangers. This can be done via an online marketplace such as Zopa or Funding Circle which enable borrowers and savers to interact directly. You could make 4% or more, but (and it’s a big but!), your money is not safe and you are not guaranteed to get it back because the people you lend to may fail to repay. Be cautious – the higher the rates on offer, the greater the risk to your lent money. It should be remembered that there is no statutory safety net as with bank deposits.
Retail Bonds
Rather than lend to individuals you can invest in Retail Bonds and lend to large companies such as Tesco, National Grid, and BT. I would suggest “mini bonds” are avoided as the borrowers are not listed on the stock market and therefore not subject to the same level of regulatory scrutiny. Unfortunately the safest Retails Bonds have seen their yields fall as their prices rise due to demand; the best measure of the overall return is to consider the “yield to maturity” which takes into account not only the interest paid but also any gain or loss on maturity.
Fixed interest security funds
Also known as “Bond funds”, offer the benefit of diversification, professional investment management and a yield of around 4.5%. They are open ended so there is no maturity date and the management charges reduce the net return (if these are taken from income not capital this artificially inflates the income yield at the expense of capital). To ensure a fund can respond to changing market conditions a “strategic” bond fund, which can invest in every type of bond, can be a prudent choice.
Author: Paul Newton FPFS, CertPFS (DM & Securities), STEP Affiliate, CertPMI is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022. Tax and legal advice is not regulated by the FCA. The tax treatment of investment products, tax levels and reliefs can depend on an individual’s circumstances and can change. This article is for information purposes only and does not constitute financial advice which should be sought before any action taken. The value of investments and the income from them can fall as well as rise and is not guaranteed which means you could get back less than you invest. Past performance is not a guide to future performance.
