Richard Troue: Retired are hit hardest by toxic mix of inflation and low interest rates

The Analyst

Most of the industrialised world is enduring interest rates which are persistently lower than the rate of inflation. This has occurred before – most notably when inflation was running at 25 per cent in the mid-1970s.

There are implications for savers, and especially for people who depend on their savings for income. The problem is aggravated for the retired, as their personal rate of inflation is probably greater than the published figure. Official figures take into account many items which have come down in price but which are discretionary purchases, such as computers and other hi-tech gadgetry.

On the other hand essentials – food, power, water, council taxes, etc – are all increasing in price, meaning retired people on fixed pensions or dependent on income from their investment capital are the hardest hit by the current situation.

Furthermore, the change to the Bank of England's remit could have long-term consequences. The Bank is still required to target an inflation rate of 2 per cent, but the change allows it to "look through" the inflation figures and target other variables, such as economic growth. This is a signal that the Government is prepared to tolerate higher inflation in exchange for a faster recovery.

I don't see the toxic combination of inflation and low interest rates coming to an end soon. Those with debt (such as the Government) will benefit, as they continue to borrow cheaply while higher inflation erodes the value of their debt. Meanwhile savers are seeing the purchasing power of their capital chipped away.

In their search for inflation-beating returns many investors have turned to the stock market. However, for most investors having all their capital in the stock market is not prudent. Fortunately there are options which exhibit lower volatility.

Traditionally corporate bonds have been a good choice for investors who want a better return than available on cash, but with less risk than the stock market. Unlike shares, with corporate bonds you are simply lending a company money, in return for which it should pay you an annual rate of interest. As long as the company remains solvent it pay the interest and when the bond matures repay the initial sum loaned.

The trouble with corporate bonds is that the income they pay, and their capital, are often fixed, so they offer no shelter against inflation. However, some companies and governments issue index-linked bonds, where the value of any income paid and the capital repaid at redemption increase annually in line with inflation.

These are exactly the types of bonds the M&G UK Inflation Linked Corporate Bond Fund targets. It aims to provide a return above the rate of inflation over the long term by investing partly in a portfolio of index-linked UK government and corporate bonds. In addition, the managers use derivatives to add an element of inflation-linking to their corporate exposure. Derivatives are also used to reduce the sensitivity of the fund to rising inflation or interest rates.

The result is a portfolio which should appeal to more cautious investors. It doesn't offer the potential for significant gains, but since launch in September 2010 it has maintained the purchasing power of investors' capital, growing by 12.5 per cent compared with a rise of 9.3 per cent for the consumer price index. It has achieved this with little volatility, particularly when compared with the stock market. Investors should also remember that if they buy this fund in a stocks and shares Isa there is no tax to pay on any growth or income.

The fund is managed by the experienced duo of Jim Leaviss and Ben Lord, who believe that central banks will continue to tolerate higher inflation. They are concentrating on inflation-linked bonds issued by large, stable companies, as they believe the yields offered by index-linked government bonds have fallen too low. The active use of derivatives, though, introduces risks not present with more traditionally managed funds.

This fund could be considered by investors who wish to protect the spending power of their capital against inflation, but who wish to take a more cautious approach. It could also be used to diversify and reduce the volatility of a more equity-focused portfolio.

Richard Troue is an analyst at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Arts and Entertainment
tvGame of Thrones season 5 ep 4, review - WARNING: contains major spoiliers!
Arts and Entertainment
tvThe C-Word, TV review
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Danny Jones was in the Wales squad for the 2013 World Cup
rugby leagueKeighley Cougars half-back was taken off after just four minutes
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThirty years on, the ZX Spectrum is back, after a fashion
Tiger Woods and Lindsey Vonn are breaking up after nearly three years together
peopleFormer couple announce separation in posts on their websites
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
Arts and Entertainment
Haunted looks: Matthew Macfadyen and Timothy Spall star in ‘The Enfield Haunting’
tvThe Enfield Haunting, TV review
The Mattehorn stands reflected in Leisee lake near Sunnegga station on June 30, 2013 near Zermatt, Switzerland
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Recruitment Genius: Online Customer Service Administrator

    £16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

    Recruitment Genius: Digital Marketing Executive

    £18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living