How do you replace lost savings income

Steve Weisner - Independent Financial Adviser Radcliffe & Newlands

Central banks across the globe are cutting interest rates in an attempt to stimulate the economy. Savers are being hit hard and those living off the interest on their savings are really suffering. There has even been a recent suggestion that the Government ought to tax savers to force them to spend or invest their money rather than save! Well, clearly that’s utter lunacy. We don’t expect for one moment that it will happen but it’s an illuminating example of how ill-advised government policy could so easily exacerbate the situation.

So what are we to do now that savings accounts are paying approximately zero? Well, in terms of zero risk to capital products, there are still some short term fixed rate bond issues appearing intermittently from various banks but it’s an effort to search them out before they disappear again.

Interest rates on deposits have fallen but so has inflation. 7% was possible on fixed rate bonds in 2008 but inflation was 4-5%. You can still get up to 4% interest now, whilst inflation is nearing 0%. Are you any worse off?

Continuing in a cautious vein, you could look at gilts (or bonds issued by Government backed banks like Northern Rock, RBS, HBOS). They could continue upwards if interest rates fall further or people and banks seek a safe haven. But once your money is tied in a bond what of the risk of inflation eroding all those gains? There seems to be some debate as to whether we’re heading for deflation or hyper-inflation which, in itself, tells you that nobody knows one way or the other. Those with inflation fears will be heading swiftly for the index linked products. National Savings comes in useful sometimes!

There has been a lot of talk lately about corporate bonds. Of course they are riskier than gilts and the higher the yield the higher the risk but prices look very tempting indeed. In fact, the pricing of bonds is probably more due to distressed selling (by hedge funds, for example) rather than solely down to a huge implied corporate failure rate that looks unlikely to happen. Hence the recent talk of excellent opportunities to be had.

In times of low interest rates investors traditionally head towards equity income. With share prices recently down the yields are looking very attractive.  Obviously for those who want to completely avoid risk to their capital this is not an option.

Older investors may use cash to buy a Purchased Life Annuity which provides a fixed income for life, with enhanced terms potentially available for those in ill health.

And would you spare a thought for property funds? Ravaged by market conditions described to me by one insider as a ‘blood bath’ back in late 2007, these poor souls have already been battered into submission. Any that retain large cash holdings could soon be in a position to snap up some property bargains for the future.

So what’s the answer to replacing lost income from savings? Diversification. When markets and economies are volatile it is better to hedge your bets. Of course many of the options open to you will be unfamiliar and you should seek our advice before re-balancing your portfolio. So if you are in any doubt as to which of the many options you should be looking at then the simple answer is to talk to your adviser immediately – any delay could cost you money as your savings continue to earn virtually nothing in the bank.

Finally, some amongst you are thinking of this as a time of great opportunity. Everything is looking cheaper by the day – stocks, corporate bonds, residential property and virtually anything else you can name. You’re holding cash and you’re keen to invest. You’re right but don’t act yet. You might have read opinions on why Japanese stocks are under priced and well placed for recovery or why emerging markets like Brazil are not affected so badly or why you should be piling into direct ownership of gold. Please, stop right there and talk to your adviser first.

Steve Weisner
Independent Financial Adviser
Radcliffe & Newlands
5th Floor Crystal Gate
28-30 Worship Street
London
EC2A 2AH  

Tel: 020 7382 0437
Fax: 0207 374 0462
Email: SWeisner@myeggnest.com
www.rad-new.com

If you have a question or if you would like to discuss becoming a client with Radcliffe & Newlands then do please complete the very short form on the right hand column of this page.

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