Savers ready to take a risk
ALL-TIME low interest rates have persuaded many ordinary savers to take greater risks with their money in order to grab a higher income.
Some have given up on cash altogether in favour of more volatile alternatives such as stocks and shares. But are higher returns worth the extra risk? BONDS Bonds have traditionally been the next step up for those wanting a better return than cash without too much volatility.
Governments issue bonds or IOUs to fund their spending, while companies issue corporate bonds to raise funds to expand their operations, paying a fixed interest rate over a set term with a guarantee to return your capital afterwards. Darius McDermott, managing director at Chelsea Financial Services, says while bond yields have fallen sharply in recent years, a small number of funds do pay more than five per cent a year.
The higher the yield on the bond fund, the greater the risk as it usually means investing in companies with lower credit scores, which are more likely to default on their repayments.
McDermott says this can be a risk worth taking: “My favourite is Invesco Perpetual High Yield, which yields a generous 5.8 per cent.”
You can get almost as much income from less risky bond funds such as Invesco Perpetual Monthly Income Plus, which yields 5.4 per cent, or Rathbone Ethical Bond, which yields 5.1 per cent. P2P Online-only P2P platforms take money from savers and lend it to individual borrowers, small businesses and property investors.
By cutting out the middleman such as banks and building societies, they should give both savers and borrowers a better rate.
The best-known platforms include Zopa.com, which pays between 3.5 per cent and 6.7 per cent a year depending on the level of risk, while RateSetter.co.uk pays up to 5.5 per cent.
Neil Faulkner, founder of 4thway.co.uk, a risk ratings agency for P2P lenders, says Zopa, RateSetter and Funding Circle have shown that alternative investments are not always high risk. “They have delivered impressive returns year after year to investors who have spread their money across hundreds or even thousands of prime, credit-checked borrowers.”
Your money is not protected by the government-backed Financial Services Compensation Scheme which covers up to £75,000 held in a savings account but Faulkner says: “Zopa, RateSetter, Landbay, Lending Works and others have impressive systems to defend investors against losses and have set aside large pots of money to cover defaults.”
Some P2P platforms promise double digit returns. Funding Secure and MoneyThing offer around 12 per cent a year. Faulkner says: “Your money is secured against real estate, vehicles and other assets. Losses have been low so far but you must understand the higher risks you are taking.” STOCKS AND SHARES Stock markets traditionally delivered a greater return than cash and bonds over the longer run, but with plenty of short-term volatility along the way.
However after the bull market runs of the 1980s and 1990s, markets have disappointed since the start of the millennium.
Justin Modray, an independent financial adviser at Candid Financial Advice, says you should put some of your savings into stocks and shares, provided you can leave the money that you have invested for at least five to 10 years.
Modray says most should buy a fund that spreads your risk by investing in a basket of shares, using your Isa allowance to take returns free of tax
He says: “The Vanguard FTSE UK All Share Index invests in hundreds of British companies and has a low annual charge of 0.08 per cent a year.”
You could also invest in a fund run by a renowned manager, such as Neil Woodford’s CF Woodford Equity Income, which has performed strongly since launch two years ago, or Terry Smith’s Fundsmith Equity, which has returned a total of 127 per cent over five years.
Bonds, P2P and investment funds offer tempting alternatives to low savings rates but only you can decide if the risks are worth taking.