Interest rates were kept on hold for the sixth consecutive month last week,
and savers are feeling the pain.
The average rate on easy-access savings accounts is now 0.77% — down from
0.98% in March, when the Bank of England cut rates to today’s historic low
of 0.5%, figures from Moneyfacts, the data firm, show. The average cash Isa
rate has dropped from 1.76% to 1.46%.
Many analysts now expect rates to remain static throughout next year.
Beleaguered savers can take heart, though. Here, we show you how the experts
are beating low savings rates with their own finances (from low to
high-risk):
Ed Bowsher, lovemoney.com
The head of consumer finance at the website is sticking with high-street
savings accounts as he believes some still offer decent returns. He has just
put £2,500 into a 1st Class Postal savings account with Coventry building
society — the top-paying instant-access account at 3.3%.
After tax, higher-rate taxpayers earn 1.98% and lower-rate payers 2.64%.
However, inflation, as measured by the retail prices index, was down 1.4% in
July on the previous year — and this increases your purchasing power. Factor
that in, and higher-rate taxpayers are in effect receiving 3.38% and lower
rate-payers 4.04% with this account.
“It’s a pretty attractive rate,” said Bowsher. “Even if you look at inflation
as measured by the consumer prices index — which excludes mortgage costs and
stood at 1.8% in July — your money easily outpaces the cost of living, and
that’s after tax.
“It’s not perfect, though,” he added. “For starters, it’s a postal account —
so you can’t operate it through a branch or online, which means I’ll be sent
a cheque each time I want to get at my cash.”
The account allows four penalty-free withdrawals a year, but the minimum you
can take out at a time is £1,000. The rate also includes a 12-month
introductory bonus of 1.3%, so make sure you hunt around for a better deal
before that expires.
The account accepts deposits of £1,000 to £250,000. Deposits up to £50,000 are
guaranteed under the Financial Services Compensation Scheme.
Neil Avery and Timothy James
Neil Avery, director at the adviser, has been buying into corporate bonds.
Investment-grade bonds have rallied sharply since March, but are still
priced for recession. For example, the average yield at the end of July was
nearly 100% more than gilts (government bonds), whereas two years ago this
gap — the “risk premium” — was just 20%, according to Merrill Lynch.
“You have to do your research carefully with corporate bonds, but for the
first time in years, investors are now being paid for the risk,” said Avery.
“With banks not lending, companies need to look at other ways of raising cash
and corporate bond managers are picking up some incredibly good deals.”
Avery has invested in M&G Strategic Corporate Bond, managed by Richard
Woolnough, which yields 5.01%. He has also put money into Invesco Perpetual
Monthly Income Plus, which mainly holds corporate bonds, but can have up to
20% of its assets in blue-chip shares. It has a yield of 8.38%. He said:
“These funds are managed by leading managers and have the backing of large
teams of credit analysts.”
George Cardale, Savills
The head of new homes for the estate agent’s Bristol branch has been netting
good returns on his student buy-to-lets, despite the recent property slump.
He bought two houses, in the Easton and Southville areas of Bristol, and a
flat in the city centre between 1999 and 2004, in the hope that they would
generate an income in the short term and capital growth in the longer term.
“I have three children — aged two, four and eight — and hope that each of them
will eventually take on one of the properties, if they want to continue to
live in Bristol, that is,” said Cardale. “In any case, I plan to hang on to
them for as long as I can.”
Research by Savills for The Sunday Times shows that yields in upmarket
areas of Bristol, such as Clifton, are extremely low, at about 3.6%, but
much higher in areas where property is not so pricey (such as Easton and
Southville), partly because rents for student digs are not significantly
lower.
So-called accidental landlords — those who decided to let property instead of
selling amid tumbling prices — have pushed rents lower, and the rent Cardale
achieves on his properties has fallen by about 10% in the past 18 months.
However, he is still getting yields of 7% to 10%. This has been helped by
the fact that he has benefited from falling interest rates because his
mortgages track the Bank rate. “I’m lucky because the properties have never
been empty,” he said. “I let them as whole houses, rather than as individual
rooms as this can be fraught with problems. Most of the tenants are mature
students, who are less risky, and all leases are for a year.”
Hannah Edwards, Killik
The broker’s financial planner is keeping a minimal amount in cash, and is
instead upping contributions to her stocks and shares Isa and self-invested
personal pension. She has increased her monthly Isa contributions from £200
to £500, and doubled the amount she puts in her Sipp to £400.
She said: “FTSE 100 stocks are yielding an average 3.8% — far higher than cash
savings rates — so why hold cash other than a sufficient emergency fund?”
Edwards hopes to make full use of her £7,200 equity Isa allowance by the end
of the tax year on April 5. From October 6, the over-fifties will see their
allowance increase to £10,200, and everyone will be entitled to the new
limit by April 6 next year.
Edwards has been largely buying into FTSE 100 stocks and holds shares in
Tesco, with a 3.1% yield; Compass, the caterer, yielding 3.5%; and Astra
Zeneca, the drugs group, which yields 4.6%.
She is also helping her mother, Anne, who is in her sixties, to beat the
savings rate slump by creating a portfolio of high-yielding income stocks
and funds. “My mum is fit and healthy, so can afford to invest over the
medium to long term — and would be foolish to remain too exposed to cash,”
said Edwards.
The portfolio includes the utility firm Centrica (yielding 4.7%), engineer GKN
(7.77%), oil group Royal Dutch Shell (6.2%), drug firm Glaxo Smith Kline
(5%) and Veritas Global Income fund (prospective yield 5.1%).
Darius McDermott, Chelsea Financial Services
The managing director at the broker has invested in the Schroder Income
Maximiser fund, which targets an income of 7%.
It is based on the ordinary Schroder Income fund, but uses derivatives to
boost income. It invests in about 50 high-yield shares in firms such as
Glaxo and Vodafone and aims to deliver a higher yield by selling “options”
on them. This means it gives up the rise in a share price above a certain
level every three months in exchange for income.
However, dividends from the fund have dropped a startling 54.6% in the past
year — from 1.3p in August 2008 to 0.59p. Nevertheless, it is still yielding
9.5%.
Brian Dennehy at Dennehy Weller, the adviser, said: “The capital performance
has been excellent in recent times, but this is scant compensation for those
with a straightforward income need. It’s sold on an income promise — so will
have disappointed many investors.”
At the riskier end of the spectrum, McDermott has also put money into venture
capital trusts, which invest indirectly in small and unquoted firms. He
holds the Baronsmead VCT 3, which is two-thirds invested in unquoted UK
companies, and one-third in firms listed on AIM.Since the trust’s launch in
2000, the average annual dividend paid to shareholders has been 5.2p per
ordinary share (of 100p) — or 5.2%.
Income (and gains) from VCTs are tax-free, so this is the equivalent to a
return of 7.7p a share — or 7.7% — for a higher-rate taxpayer (as dividends
are usually taxed at 32.5%). At present, Baronsmead can be bought only on
the second-hand market, which means you do not get tax relief on your
initial investment.
However, there will be a top-up to this VCT later this year, which will allow
investors to buy in with 30% tax relief on investments of up to £200,000 a
year, as long as you hold them for five years. This means if you invest the
full amount, you will receive £60,000 back from the taxman.
Ben Yearsley, Hargreaves Lansdown
The adviser’s investment manager has been inspired by the rise of Britons
holidaying at home rather than jetting off abroad.
He has invested in caravan parks via the Darwin Leisure Property Fund.
Launched in 2008, the fund is unregulated — which means you lose your money
if it all goes wrong. You cannot hold it in an Isa, but it can form part of
your pension and Yearsley has about 10% of his Sipp in it.
Yearsley is bullish on the prospects for the fund, which yields about 5%.
“It’s very high-risk, though, so it’s not for everyone.”
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