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.