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
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.