What you can do to maximise your income
WHILE savers wait in hope for Hammond to cut them some slack, there are steps they can take to maximise their income opportunities.
STEP ONE: Chase rates
THERE are still a smattering of savings accounts which are paying gross interest in excess of inflation – one per cent. But they are few and far between and available primarily from non-mainstream providers.
For example, Hodge Bank is paying 1.3 per cent — 1.4 per cent on balances of £50,000 or more — while Charter Savings Bank is paying 1.31 per cent. Both are 90day notice accounts.
Rates of up to 2.01 per cent are available on five-year fixed-rate savings bonds, but with such long fixes, there is a danger the returns could become unattractive if interest rates start rising again. Some banks and building societies continue to offer high interest current accounts.
For example, Nationwide Building Society is paying five per cent on balances up to £2,500. This rate reverts to one per cent after a year. TSB is paying five per cent on £2,000 although this is reducing to three per cent in January with the rate only applying on the first £1,500. SavingsChampion’s Susan Hannums says: ‘High interest current accounts and longer term fixed-rate savings bonds are still offering savers a real return ahead of inflation.
‘It’s no surprise they remain popular with savers desperate to hunt down a decent rate of interest.’
STEP TWO: Take a little risk
MANY savers, understandably, refuse to take any risk with savings. But higher income is possible by taking a risk with your capital and investing it in the stock market.
Dividends from companies listed on the UK stock market continue to grow, boosted by the parlous state of the pound. The latest dividend analysis from Capita Asset Services indicates that dividends this year will hit £84.7billion, 6.6per cent up on the year before. These dividends are providing investors with a yield in the region of 3.6 per cent.
These are best captured by investors via equity income oriented investment trusts. This is because the trusts invest in a range of dividend paying companies, usually in the UK but sometimes globally, therefore protecting investors from dividend cuts made by individual companies. The trusts’ managers can also control the distribution to shareholders of the income they generate from their holdings. By doing this, the best managers have been able to provide a growing income, year in and year out.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, says 20 trusts have raised their dividends every year for at least the past 20 years. ‘I call them the dividend heroes,’ she says.
They include The City of London (50 years of dividend growth), Alliance (49), Bankers (49), and Caledonia (49).