Five-minute guide to boosting your income
Income generated from savings can help boost our finances, meet monthly bills and supplement pensions. So how can we maximise this? Here's our guide to the options:
Plunging interest rates have seen savings rates sink to record lows, making it tricky to earn decent levels of income from traditional cash accounts.
However, if you're looking for a short-term home for your money these accounts remain the best option. Using your individual savings account allowance – where you can shelter up to £5,100 a year from the taxman – is the ideal starting point.
Which type of account you choose depends on whether you need instant access to your cash or can tie it up for a period of, say, a year.
You can currently get around 2.8% from the top-paying easy-access ISAs. Once you've used your ISA allowance, banks and building societies provide a range of other savings accounts where you can park your cash.
However, remember to check the terms and conditions carefully, particularly if you need to make withdrawals.
Gilts and corporate bonds
If you're looking to yield a slightly higher income you could consider bonds. By investing in these, you are effectively loaning money to a government or company in exchange for a fixed rate of interest over a certain period.
In the UK, government bonds, known as 'gilts', are usually seen as the 'safest' bond investment.
"But their attractiveness hinges on government plans to reduce the budget deficit; if gilts reached yields of 5% then they would be a buying opportunity," says Ben Yearsley, investment manager at IFA Hargreaves Lansdown.
Gilts can be bought through the government's UK Debt Management Office, or second-hand via a stockbroker. There are two main types of gilt – conventional and index-linked, with the interest paid known as the 'coupon rate'.
With conventional gilts, the government agrees to pay the holder a fixed cash payment every six months until the maturity date, at which point the initial sum invested is returned.
Index-linked gilts take inflation into account, so both the coupon and the principal will be adjusted in line with the UK retail prices index.
There are also corporate bonds, which are riskier but tend to have a higher yield – you can currently get around 5%. They range from investment-grade to high-yield corporate bonds; the latter are riskier but provide better returns.
You could consider an equity income fund, if you're happy to take on more risk. These enable you to buy into companies that are expected to pay a decent income to investors in the form of regular dividends – but they are subject to the highs and lows of the stockmarket.
"If you can get 4% to 5% income from these funds – which many are offering at the moment – you should consider them," says Yearsley.
Essentially, you are relying on the skills of a specialist fund manager to do the research on your behalf and purchase a portfolio of shares for you.
According to Yearsley, there are a variety of favoured equity income funds yielding over 4%, with top-performing managers. These include Artemis Income, Newton Higher Income and Invesco Perpetual Income.
Gavin Haynes, managing director of IFA Whitechurch Securities, adds: "These funds are biased towards high-yielding blue-chip UK stocks."
Another option is commercial property. You can buy into a specialist fund that has the capability to tap into income from, for example, an office block or shopping centre – as most of us aren't able to do this directly.
The financial crisis has seen this sector suffer, but many funds are still yielding around 4% – much more than you can achieve with a cash deposit.
"However, you only have to see the hoards of empty commercial property to realise it's not a one-way bet," warns Yearsley. Think carefully before relying on these funds for future income.
What's right for you?
- Stick to ISAs and cash accounts if you might need access to your cash over the short term.
- Bonds may offer a better return if you're shy of the stockmarket, but you must be willing to invest over the medium term.
- Diversifying between cash, bonds and equity income funds will spread risk.
- Consider equity income funds that focus on strong blue-chip stocks with decent yields.
- Over the long term, the stockmarket is likely to provide greater capital growth and income than cash accounts.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.