The Financial Group
We simplify all those essential financial decisions
Where do you invest for income? Many of us have come to rely on the income generated by our savings, not only to pay for little luxuries, such as foreign holidays and flat screen TV’s, but also to help cover the monthly bills. This 'extra' money can be a tremendous boost to our finances at any age - but is particularly important when we give up work and need to supplement our pensions. However, plunging interest rates which sunk to their lowest level in more than 300 years at the back of 2008 have made it increasingly difficult to earn decent levels of income from traditional savings accounts. So the question is - how else can you generate income from your hard-earned cash? In this article we look at 4 of those options: Savings accounts Fixed Interest Bonds Equity & Commercial Property Structured Products Should you consider investing? We believe it all depends on how long you want to tie your money up, because those who are able to invest for the longer term can benefit from a much wider range of options. Savings Accounts These best suit short-term investors who want to retain access to their money. Even though returns are low, the capital will be secure - important for people who don't want to put any of their money at risk. If this is the case for you, high street banks and building societies are an ideal starting point. Savings accounts are generally straightforward to open and simple to understand and you can deposit money quickly and easily. What’s the downside? The downside, however, is that the income generated depends on prevailing interest rates, which are subject to change, and this makes long-term planning tricky. You can currently get around 2.75% in easy-access accounts, while up to 3.3% is available for those willing to lock their cash away in a notice account. And if you rely on the income generated by deposit accounts, bear in mind that if you continually spend the interest you receive, then your capital will never increase. In fact, its value will actually fall over time, due to the negative effect of inflation. Here’s a handy savings account checklist Fixed-interest bonds If you're looking to yield a slightly higher income you need to move away from cash. For those of you who do not wish to take much of a risk, you could consider fixed-interest accounts usually accessed through a specialist bond fund which normally pay a better rate of interest than cash, in return for a bit more risk. These products, usually known as bonds, mean you effectively loan money to a government or company in exchange for a fixed rate of interest over a predetermined period. The product's face value is returned on a specified future date. Bonds issued by stable governments such as the UK are regarded as the safest, although the downside is that their low-risk status means they will usually offer a much lower rate of interest than higher-risk bonds. In the UK, government bonds are known as 'gilts', and can either be obtained new through the government's UK Debt Management Office, or second-hand via the stockmarket. If you opt for the latter, you usually go through a stockbroker. ( more info ) But if you feel gilts are not generating enough income, you could consider corporate bonds, which are slightly riskier but usually generate a higher yield. These mean you lend money to companies in exchange for an agreed rate of interest and the face value of the bond back in the future. Each bond will have a nominal value (usually £100), which is the price that will be paid to you when it reaches the end of its life, in addition to the bond's yield. Although life spans will vary, they are generally less than 10 years. However, there's no guarantee that the issuing company will keep up with the interest payments or pay the face value on the date of maturity. The likelihood of them honouring their commitments is analysed by specialist ratings agencies on a sliding scale. The most trusted bonds will be awarded AAA status. The amount of risk taken and the potential return an investor might receive increases the further you move down the ratings scale. Those rated BBB or above are known as 'investment grade', while those below are classed as 'high yield' sometimes referred to as 'junk bonds'. Holders of these bonds will be backing financially riskier companies in exchange for an increased level of potential income. Our opinion . The Financial Group feel that the M&G Strategic Corporate Bond Fund is a reasonably defensive bond investment. Manager Richard Woolnough's idea is that “when it comes to investing in credit, the best performance is gained by avoiding the losers rather than picking the winners." Equity and commercial property If you're happy to take this level of risk, other asset classes you could also consider are equity and commercial property. On the equity side, you can buy into companies that are expected to pay a decent income to investors in the form of regular dividends but this is not a strategy for the faint-hearted. A more common option is to invest in an equity income fund, whereby you rely on the skills of a specialist fund manager to do the research on your behalf and purchase a portfolio of shares for you. Unless you're comfortable purchasing and trading individual stocks yourself, then this will be the most sensible path for you. Of course, even having your portfolio managed by a specialist is no guarantee of success. Stockmarkets can be volatile as has been illustrated over the past few years – so you need to be sure about the kind of stocks the manager is buying. Our opinion The Financial Group favour the Invesco Perpetual Income Fund. Equity income has been out of favour in the rally because everyone has gone for capital growth, but we like the defensive shares in which manager Neil Woodford is investing. The next area that may warrant a look is commercial property. While most people won't have the financial means to buy an office block or a string of warehouses,they can buy into specialist funds that do have this capability. Although the sector has had a torrid time of late, the rent paid on the average UK commercial property, as a percentage of the current, significantly reduced property values, equates to a yield of around 8%. This may be attractive to income- seekers, although capital values could still fall further. People looking for income should stick to property funds that are heavily invested in actual bricks and mortar rather than shares in property companies, as the latter will increase your exposure to the stockmarket. Structured Products If none of these investment vehicles suit you, another alternative is guaranteed equity bonds which, broadly speaking, promise a stockmarket-linked return if the market meets certain benchmarks and the return of your original investment if it falls. However, there are different types of structured products. Most of the deposit- based products from banks and National Savings & Investments will return your capital in full, but returns are limited. This however, does not have to be the case. Many providers can offer much greater returns and still offer capital protection provided the market does not fall below certain barriers - often 50% or 60% of the starting level. Our opinion We have valuable experience in these products and, as an example, favour the following income product from Gilliat at present. The Gilliat Income Builder is a structured product which aims to pay an annual income up to a maximum of 6.0% gross per annum, paid quarterly. Income accrues on a daily basis so long as the FTSE 100 remains above 3,000 points. It aims to return initial investment capital at the end of the investment term (13 January 2017) provided the FTSE 100 is above 3,000 points on the day of maturity. There are many structured products in the market today that offer returns to meet all our client’s needs. They can provide growth or income, although all have a minimum term of three years. We do not recommend you invest money in these investments if you may need the money within this term.