New weapons for savers in the bat­tle against in­fla­tion

Na­tional Sav­ings, banks and build­ing so­ci­eties have given up on in­dex-linked ac­counts. So what’s left, asks Sam Brod­beck

The Sunday Telegraph - Money & Business - - Front page -

Last Thurs­day’s Bank Rate rise may have been the first for a decade, but it does not her­ald a re­turn to pre-cri­sis sav­ings rates. The re­turns on cash re­main a frac­tion of their pre-cri­sis lev­els. In­fla­tion, though, is at a five-year high. And while this im­me­di­ate spell of in­fla­tion – trig­gered by the rise in cost of ex­ports af­ter sterling’s fall – may be short-lived, ex­pec­ta­tions are of longer term in­fla­tion per­sist­ing at a level well above the rates of re­turn on low-risk in­vest­ments.

Not long ago, there was a wide choice of ac­counts from banks, build­ing so­ci­eties and Na­tional Sav­ings & In­vest­ments (NS&I) that paid re­turns linked to in­fla­tion. These have largely dis­ap­peared.

Birm­ing­ham Mid­shires, part of Lloyds Bank­ing Group, closed a five and three-year Isa that paid in­ter­est linked to in­fla­tion in 2012. NS&I stopped sell­ing pop­u­lar in­dex-linked cer­tifi­cates to new in­vestors at a sim­i­lar time.

The cost of de­feat­ing in­fla­tion in an era of low re­turns was too high.

This trend was all too clear in the prices paid to pro­vide an in­fla­tion­linked in­come via an an­nu­ity pol­icy. At to­day’s an­nu­ity rates, it would cost a 65-year-old £180,000 to buy an in­fla­tion-linked an­nu­ity pay­ing just £5,000 a year.

“There are no longer any sav­ings ac­counts which are linked to in­fla­tion,” said Rachel Springall, of Money­facts, the fi­nan­cial data firm.

“There used to be a se­lec­tion of in­fla­tion-linked ‘struc­tured’ prod­ucts, but it’s a very dif­fer­ent set­ting to­day,” she con­tin­ued. “Bonds with in­fla­tion links, in­clud­ing ver­sions where cap­i­tal was and was not pro­tected, have died off.”

The stock mar­ket has also lost its at­trac­tion. Sky-high share values mean yields – div­i­dend in­come rel­a­tive to share prices – are low.

Bonds is­sued by gov­ern­ments and com­pa­nies of­fer­ing an in­dex-linked re­turn are also eye-wa­ter­ingly ex­pen­sive. A pop­u­lar bond is­sued by Na­tional Grid in 2011 pay­ing 1.25pc plus in­fla­tion (RPI) per year, and due to ma­ture in 2021, cur­rently trades at £1.25 for every £1 bond. Any­one buy­ing now and hold­ing to ma­tu­rity is guar­an­teed to make a cap­i­tal loss.

Pri­vate in­vestors can buy in­fla­tion­linked govern­ment bonds, known as “link­ers”, via bro­kers. These too have been poor value for some time. Large in­vestors, such as pen­sion funds, and the Bank of Eng­land it­self, have bought “gilts” in huge quan­ti­ties. A UK govern­ment bond ma­tur­ing in 2024 pays a “run­ning yield” of just 0.096pc, for in­stance.

Ja­son Hol­lands, of Til­ney, the wealth man­ager, rec­om­mended avoid­ing hold­ing bonds, in­clud­ing bond funds, of any sort.

“You need to have a de­cent slug of your port­fo­lio in the stock mar­ket and other types of risk as­sets, such as com­mer­cial prop­erty and in­fra­struc­ture projects that have in­fla­tion-linked in­come built in,” he said.

Listed-in­fra­struc­ture com­pa­nies, how­ever, are highly prized and al­most all trade at dou­ble-digit pre­mi­ums to the value of un­der­ly­ing as­sets.

In­stead, Mr Hol­lands rec­om­mended the Lazard Global Listed In­fra­struc­ture Eq­uity Fund, which has re­turned in­vestors 26pc since the start of the year.

In­vest­ment trusts with track records of com­mit­ted div­i­dend dis­tri­bu­tion are worth con­sid­er­ing – but won’t nec­es­sar­ily win the fight.

Tele­graph Money’s anal­y­sis of the As­so­ci­a­tion of In­vest­ment Com­pa­nies’ “div­i­dend heroes” – trusts that have in­creased their pay­outs on a nom­i­nal basis for 20 con­sec­u­tive years or longer – found that one third did not grow their pay­outs as fast as the RPI mea­sure of in­fla­tion over the past 10 years.

Of those that did, F&C Global Smaller Com­pa­nies recorded the high­est div­i­dend growth, at 161pc, com­pared with RPI of 42pc.

The £2.3bn Wi­tan In­vest­ment Trust has also dou­bled its div­i­dend since 2006.

Mr Hol­lands pointed out that when to­tal re­turns were taken into ac­count – cap­i­tal growth and in­come – many more shares, in­vest­ments trusts and unit trust funds will out­strip in­fla­tion. In that case in­come-seek­ers may have to make dif­fi­cult de­ci­sions to sell shares or units to boost their in­come.

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