As everyone knows, the Bank of England recently cut interest rates to 1%, and a further 0.5% cut is being predicted in the next couple of months.
At the time of writing high street bank premier accounts are offering uninspiring returns. For example, Barclays Premier are offering 1.16% AER on their E-savings account for balances of £250,000 or more, Royal Bank of Scotland Private Bank 1.04% AER on balances between £100,000 - £999,999 and HSBC Premier 0.4% AER.
Many pensioners have been using savings interest to provide much needed income. They have seen their income fall dramatically over the last few months and are now looking for answers. It is this group I would like to focus on.
I clearly don't have room to cover all aspects such as attitude to risk, timescales among others or any option in detail - this is simply an overview and hopefully a memory jogger for some.
One option is to start eroding their savings capital, although this is clearly not ideal, as there is a chance that capital could become completely eroded over time. Furthermore this will eat in to any inheritance they may have been planning on leaving.
With inflation looking like it will continue to fall, and deflation becoming a possibility later this year, interest rates are unlikely to move up for some time.
Ideally, if possible spending should be reduced for the foreseeable future. A full analysis of income and expenditure would reveal possible areas where savings can be made.
Permanently lock capital away
The purchase life annuity is much derided, but can look attractive in times like these.
Index linking seriously erodes the starting level of the income, but purchase life annuities can offer a compelling alternative to income producing savings, particularly where there are no concerns over inheritance. Those with health issues could benefit from enhanced rates, and the treatment of the income as part return of capital can help with the management of income tax.
Lock away capital
Fixed deposit accounts offer higher returns for those who are prepared to lock their cash away for a year or so. Those who can commit to a longer time frame might consider some of the structured products available.
There are those with no capital risk and those with risk to capital (known as SCARPS - Structured Capital at Risk Products). Both should be approached with caution and certainly not by those who do not understand the structure and mechanics of these investments.
Many SCARPS have floors that trigger a potential loss of capital at the end of the period - typically if an index falls by more than 50% during the investment period. You might think this is unlikely but it could happen - for example the FTSE 100 has traded in over a 44% range in the year to January 2009, and many overseas markets have traded in a range greater than 50%.
You should also consider the counter party risk and be aware that the Investors Compensation Scheme only covers investors if the plan manager gets in to trouble. There is usually no cover if the counter party fails, meaning that the investor could lose all of their investment. For more information on this I would refer advisers to www.futurevc.co.uk
I have seen many suggestions that investors move in to bond/gilts. This strategy obviously generates an income, and if it is direct investment rather than via a collective, a potential redemption or return of capital.
Advising on direct investment in this area is beyond my expertise, however I would urge care when considering collective funds in this sector. An adviser must look beyond the front page and consider not only the yield of the fund, but the risk the fund is taking in obtaining that yield. Higher yielding funds are nearly always investing in higher risk bonds, and this may be beyond the profile of your client.
Alternatives to cash investment will be widely sought for the majority of this year and advisers should be cognisant with the risks and rewards of all alternatives.
Despite improved risk appetite
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