The Search for Income
21st April 2009
Recently the SIFA sent its members some market advice that here, Martin Silverman, Partner and Financial Adviser at IBB West London Solicitors comments on.
Historically low levels of interest rates on deposits have done little to stop the flow of cash which is seeking protection from unstable investment markets. However, those who are dependent on their savings income in particular, the elderly, are concerned about the level of returns they are generating on their savings.
Martin comments “There are better ways of generating returns but they necessarily involve higher risk, so financial plans must be based on the all important principle of diversification.”
There are several options which the elderly and those planning for their future could consider:
For larger sums (usually £30,000 and over), there are often better rates from banks and building societies although there is usually a requirement to tie up the money for at least two years. Instant access accounts are being penalised; and some offers are open only to savers aged 50 and over.
Martin advises clients that “it is important to check that the organisation offering the attractive rate is covered by the UK Financial Services Compensation Scheme.”
Some of the best rates are available on cash ISAs as savers tend to be less prone to switching and the returns are tax-free. Only half the £7,200 annual ISA allowance may be invested in cash ISAs, but couples can invest £3,600 each. There is also the facility to switch from cash to stock market funds at a future date (but not the other way around).
In the current tax year (2009/2010) the ISA "allowance" for the over 50s has been raised to £10,200, half of which can be placed in a cash ISA. This higher limit will be available to everyone over the age of 18 from the tax year 2010/2011.
Government bonds (gilts)
Gilts were one of the few investment sectors which out-performed in 2008. However, some experts have warned that the effect of the large Government funding programme aimed at stimulating the economy may make gilts a danger area for the future.
Corporate bonds have much greater appeal and some offer better returns which many fund managers consider over-compensates for the risks involved. This is prompting them to move out of gilts into corporate bonds.
Martin advises clients to “read the small print and thoroughly investigate the underlying holdings which the manager has bought into his fund as some funds have been found to have been protecting corrupted funds”
Arguably, the most appropriate type of bond fund for the long-term investor is a ‘strategic’ bond fund, which is not confined to any particular sector of the bond market but allows the manager to exercise his judgment as to the appropriate weightings in the light of changing market conditions.
Global bond funds
One of the other sectors which prospered during 2008 was Global bonds (funds which invest in the fixed interest securities of overseas companies). This was due to the decline in sterling, which increased the overseas earnings. Martin comments “The decline of the pound may now have reached its low point, so currency considerations may influence the decision of placing fresh funds in this sector.
UK Equity Income funds
The UK Equity Income fund sector, which had traditionally been regarded as a core investment holding, has performed poorly in the economic crisis, largely because of its exposure to banks. However, that is not to say that all the funds within that sector performed badly. There are one or two managers who managed to avoid the worst of it.
The banks themselves remain a speculative play. The Barclays share price increased by 25% on a single day in March, but the downside could be equally dramatic. Nevertheless, the profits on other UK equities are temptingly attractive, with the FTSE All-Share index yielding around 5%; half of which derives from non-bank stocks such as pharmaceuticals, tobacco and oil. This has prompted some commentators to suggest that the time may have come to re-enter the sector, though others point out that companies are slashing their dividends to cope with the recession, and suggest delaying investing for a further six months.
The term ‘structured product’ refers to any form of packaged investment which is based on securities derivatives such as financial options. Most structured products have a fixed term and offer a guarantee which provides protection of the principal sum invested if the product is held to maturity.
The credit crunch has demonstrated that structured products require particular attention because theirguarantees are only as good as the organisationswhich stand behind them. Providers of these products will usually seek to reduce this risk by having it underwritten by a number of other organisations, but this gives rise to the question of ‘counterparty risk’, (the risk that one of the parties to the agreement may default on their obligations). It is therefore important to ensure that structured products are covered by the Financial Services Compensation Scheme.
The interest rates available on National Savings Investment and Savings accounts are unexciting, but for the growing number of people who believe that Government policy is stoking up inflation, Index-Linked Savings Certificates could be attractive. These provide guaranteed index-linking plus 1%, tax-free, but they are not suitable for those requiring a regular income.
Martin concludes, “The above information is a brief guide to the options available for generating better returns on savings. Everyone has a different amount of savings in various accounts and we can help tailor our approach and advice to suit their individual’s needs.”
For further information on the above or any financial matter, please contact Martin Silverman on 08456 381381.