Escape from the trap

By NEIL SIMPSON
Updated:

 

Times have never been as tough for savers who rely on investment income. They are having to prepare for the financial demands of the third millennium using interest payments that have not been so low since Queen Victoria was on the throne.

Anyone whose income is from an average bank or building society savings account will have seen payments slump by almost two thirds since last summer.

What makes their situation worse, says independent financial adviser David Aaron, is the growing realisation that low interest is here to stay.

But there are ways to beat the income trap and stretch money much further than is possible with an ordinary bank or building society savings account.

Researchers at financial magazine Moneyfacts say the average instant access account now pays just 1.1% net of tax - well below the latest 1.3% inflation figure.

'The 1.1% figure is the lowest average interest payment since our records began,' says Moneyfacts' Emma Butler. 'And our records did not begin five, 10 or even 20 years ago. They began in 1874.'

'It is little wonder,' says Aaron of the David Aaron Partnership in Woburn Sands, Buckinghamshire, 'that people are now so keen to find ways to boost their incomes. This is the number one concern of many of our clients.

'In the past, low rates have been paid for short periods. This time we need to get used to managing money in an entirely new economic environment.'

Three broad groups are caught in the income trap - those in retirement, those about to retire and those who have been made redundant late in their working lives and have difficulty finding new jobs.

Wai Man Cheung, managing director of independent adviser WMC Investment Managers in Blandford Forum, Dorset, says: 'Unfortunately this is one of the worst times for taking early retirement.

'Anyone retiring now, when returns appear so low, will have to plan carefully to make their money last a long time.'

Aaron says: 'Many people can boost their income just by applying some simple financial housekeeping.

'There are a number of relatively small steps they can take that will make a worthwhile difference to their situation.'

Aaron says couples in particular should make a start by taking full advantage of individual personal tax allowances.

'If one spouse is only just in the higher tax bracket and the other is a lower or non-taxpayer, moving some assets from one name to the other could produce a modest but useful tax saving,' he says.

But changes of this kind are unlikely to transform a bleak retirement into a life of plenty. So a more detailed strategy is called for.

That is where this Financial Mail series will help. Week by week we will look at the financial products that can be used to boost incomes.

These start with higher-paying savings accounts, generally offered by newer entrants to the savings industry and operated by post, telephone or the Inter-net rather than in High Street branches (see right.) Other investment choices we will explain in the weeks ahead will include with-profits bonds, corporate bond Isas, high-income unit and investment trusts, National Savings products, distribution bonds, guaranteed income bonds and government gilts, and split capital investment trusts.

Graham Bates, a partner of independent adviser Bates Investment Services in Leeds, says: 'The range of options for anyone seeking to boost income can be dazzling and confusing.

'In many ways, investing for income can be much more difficult than investing for capital growth.

'With capital, as long as the strategy is to invest over a wide range of products giving a spread of risk, investors can more or less trust to time to help achieve a satisfactory result. With income, investors must take many more issues into account.'

Unfortunately, income-seekers can rarely afford to make mistakes.

Aaron says: 'Anyone unlikely to work full-time again cannot rebuild assets in the future, so they must be certain to make the most of what they have.

'The tax-free lump sum that many savers receive from a pension fund when they retire may be the biggest single sum they ever have. This money can make a healthy income even in today's low-interest climate.

'But time should be taken to invest it wisely.'

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