Where can a poor investor go for a decent return?
In the new world of low interest rates, those 7 per cent savings deals are fading fast. From fixed accounts to ISAs, bonds and shares, Julian Knight sees where you can turn to keep your cash growing
Sunday 07 December 2008
At 2 per cent, UK interest rates are now at historic lows and investors are having to adjust their sights. "The financial services industry used to look at 7 per cent annual growth as a good rule of thumb," says Neil Clarke, director at independent financial adviser (IFA) Lucas Fettes. "But in this new environment, this is no longer as relevant.
"Nowadays, we are looking at a per cent above inflation being acceptable and 2 or 2.5 per cent being very good. Investors, I'm afraid, have to set their expectations lower."
That 2 or 2.5 per cent above inflation, which is currently standing at 4.5 per cent, puts Mr Clarke's new performance target roughly in the 7 per cent range. Crucially, though, most experts reckon that inflation is heading south fast. "If you can get a 4 per cent annual return with security then that is looking good," says Keith Churchouse from IFA Churchouse Financial Planning. "Government gilts, for instance, are paying around the 4 per cent mark, while the return on premium bonds is between 2 and 4 per cent if you enjoy average luck scooping a prize. "
Perhaps the only upside of the credit crunch has been the desperation of banks and building societies to attract saver cash, with some paying over the odds. Only a couple of months ago, that 7 per cent benchmark was easy to achieve through fixed-rate and regular saver accounts. But since the Bank of England cut the base rate by 1.5 per centage points in November, savings deals have come off considerably. In most instances, reports financial information firm Moneyfacts, rates have fallen by 1.5 per cent. With the Bank having cut again, the good days could soon seem a distant memory.
"By the middle to end of next year at the very latest, savings account rates – and their premium over the base rate – will be a lot lower. The banks are building their deposit levels and once that's done there will be no reason to pay the rates they do now," says Anna Sofat from IFA Addidi Wealth, adding that the smart money is on returns being in the low single digits.
Financial experts reckon that the best play under these circumstances is to buy into fixed-rate savings accounts, though there are a couple of provisos. First, many of these deals impose restrictions on access, so only put your money in if you are sure you won't need it in a hurry. Second, the fix usually only lasts for a relatively short period – a year, say – and after this, the rate will often revert to a lower level. Moneyfacts says best buys include Principality building scoiety's one-year fix paying 5.76 per cent and Anglo Irish Bank at 5.75 per cent.
In the long run, savings accounts are unlikely to deliver growth well above inflation, never mind reaching the magic 7 per cent: "Looking over 10, 15 or 20 years, savings on average deliver just above inflation," says Ms Sofat. "But this pales compared to the long-term performance of shares."
However, she adds that money held in a cash individual savings account will increase returns as interest is paid free of tax. Up to £3,600 can be saved in a cash ISA each year. "You always have to factor tax into the equation," explains Ms Sofat. "For example, the three- and five-year, index-linked bonds from National Savings & Investments offer to pay 1 per cent above inflation. That's OK, but when you realise that this is tax-free, suddenly the returns are much more attractive."
Despite substantial falls on the stock market over the past 18 months, advisers still push the idea of share investment as a way to achieve above- inflation growth – though investors should be cautious, says Mr Clarke at Lucas Fettes. "Over the long term, I still think it will be the case that share investment does better than savings accounts. But if you're buying individual company shares then look at firms in 'defensive' sectors, which pay a dividend. If you're earning a 4p or 5p dividend in the pound, that's a very good return in the new low interest rate world." Generally, defensive sectors include staple foodstuffs, arms, pharmaceuticals, mining and oil.
But Mr Clarke adds that younger investors with time on their side to make good any short-term losses should look east for returns. "Markets in the emerging India, China and Pacific economies offer the prospect of good long-term growth; unit trusts investing in these areas could give you a chance of beating 7 per cent. However, as we have seen in the past year, there are also substantial risks, at least in the short term."
Further tax advantages are available if you buy shares and other investments through a self-invested personal pension. "With Sipps, higher- rate taxpayers get relief on contributions of 40 per cent, and what's more they are flexible as you can take 25 per cent of the pension pot as a tax-free lump sum at age 75 and you don't have to use the money invested to buy an annuity until 75 or after," says Ms Sofat.
Outside shares and savings, IFAs are turning to bonds, some of which pay around 7 per cent. "Many good companies are paying a high yield now," says Dean McCarthy at Cobalt Capital. "This means there are lots of bargains as bond markets are overpricing the effects of the recession. Some are figuring default rates will be as high as in the great depression; I don't think that's going to happen."
Even government bonds, or gilts, once a Cinderella investment favoured only by ultra-safe individuals and pension funds, are starting to pay more and may have to raise that rate in future because of the UK's burgeoning national debt. "Some gilts are paying around 4 per cent and that's pretty good," says Mr Churchouse. "One consequence of the Government needing more debt is that it will have to attract more investors."
But Colin Jackson, director of IFA Baronworth Investment Services, reckons that by boxing clever you get more than 4 per cent. "You have to take a little risk but not too much to get a reward. There are so-called 'structured products' out there that pay an income of 7 to 7.5 per cent a year provided the stock market doesn't crash or there is a mass failure among insurance companies," he says. "If, like me, you think shares have fallen too far and view a collapse of insurers as very unlikely, then these structured products offer an interesting option.
"Just bear in mind that it's a good idea to have a spread of investments – savings, shares, bonds – alongside more specialist products."
Buyers beware of new-build home headaches
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Donald MacInnes: My wasted hours in the retail deserts of Dixons-Carphone
Bargain Hunter: From The Outsider to 1984, catch a cut-price classic, read it in the rye
Energy switching app Voltz allows users to switch with just a few taps
- 1 Man who held up 'hire me' sign at Waterloo station returns a year later with 'I'm hiring' sign
- 2 Mother of newborn Baby No 59 trapped in sewer pipe told Chinese police she 'heard crying' when she raised alarm
- 4 Tennis fan suing Australian Open organisers for 'failing to shade spectators' during Murray match
- 5 This crazy skiing video will leave you feeling queasy
British Muslim leaders outraged after Eric Pickles says followers of Islam should 'prove their identity'
UK terror fears: My jihadist son returned from Syria mentally scarred – now he is being ignored
Nigel Farage: NHS might have to be replaced by private health insurance
Billy Crystal: 'Stop shoving gay sex scenes in my face'
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
iJobs Money & Business
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...
£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...
£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village