Start taking risk into account
EIGHT years after the Bank of England slashed interest rates to near zero, hard-pressed savers are getting a worse return than ever.
The average easy access cash savings account now pays a meagre 0.37 per cent and even best buys pay little more than 1 per cent (see page 38). With consumer prices expected to top 3 per cent this year, savers have a battle on their hands.
However, it is possible to get income of 4 per cent or more, if you are willing take on more risk.
CURRENT ACCOUNTS
Nationwide’s FlexDirect current account pays 5 per cent on the first £2,500 in your account, but only for one year. After that you get 1 per cent. You need to pay in a minimum £1,000 per month to qualify.
Other high-interest accounts from the likes of Santander and Tesco have been either cut or withdrawn, although TSB Classic Plus still pays 3 per cent on up to £1,500, if you pay in £500 a month.
P2P LENDING
Peer-to-peer (P2P) platforms take money from savers and loan it to people and small businesses. The aim is to bypass banks and building societies giving savers and borrowers a better rate.
P2P is riskier than a savings account, because your money is not protected under the Financial Services Compensation Scheme. Neil Faulkner, founder of 4thway. co.uk, a risk rating service for P2P platforms, says a number of sites pay around 4 per cent with little risk. “They vet borrowers, incur minimal bad debts and have defences to prevent losses.”
He tips LendingWorks.co.uk, which currently pays 4.5 per cent a year over five years. “It selects just prime borrowers and has a reserve fund and insurance to cover losses. RateSetter.co.uk pays up to 5.6 per cent. It spreads your money across thousands of personal, business and property loans, with a reserve fund to cover losses.”
Pioneer Zopa.com pays 2.9 per cent with easy access, or up to 6.1 per cent on its higher risk option.
FundingCircle.com lends to small businesses and property developers and pays up to 7 per cent.
Faulkner adds: “Lower your risks by spreading your money across lots of loans and several P2P platforms.”
BOND AND PROPERTY FUNDS
Getting income of 4 per cent is not easy in today’s low interest-rate world but Jason Hollands, managing director at independent financial advisers Tilney, says some corporate bond funds achieve this figure.
“The more yield you want, the more risk you will end up taking.”
TwentyFour Corporate Bond fund currently yields 4.2 per cent and invests mainly in high-quality UK businesses, plus a sprinkling of riskier high-yield bonds.
Henderson Fixed Interest Monthly Income fund yields 5.2 per cent with almost two thirds of the fund invested in high-yield bonds.
Invesco Perpetual Monthly Income Plus pays 4.5 per cent from standard and high-yield bonds, and some UK stocks.
The riskier AXA Global High Income fund invests wholly in highyield bonds and pays 5.8 per cent.
EQUITY INCOME
The UK equity income fund sector is one of the most popular for those happy to try stocks and shares.
Funds invest in a spread of top UK companies for dividend income and capital growth, with many yielding around 4 per cent.
Laith Khalaf, senior analyst at IFAs Hargreaves Lansdown, says the average equity income fund turned £10,000 into £17,796 over 10 years, with dividends reinvested for growth. Cash would have returned £11,361.
Trojan Income, from Troy Asset management, turned £10,000 into £22,700 and currently yields 3.64 per cent.
SLI UK Equity Income Unconstrained yields 3.73 per cent and Threadneedle UK Equity Alpha Income yields 4.30 per cent.