The highest available income? (When interest and dividend returns are low)

Wednesday, 11th February 2009 17:43 - by Resident IFA

I blogged on February 7th about the paucity of returns to be had from Savings accounts at present, ending with the suggestion of an alternative to leaving the money in such a Savings account. A colleague of mine recently had an experience which brought this into clearer focus, but not in relation to Savings accounts... He visited a 78-year old lady and undertook a review of her financial arrangements. The investments she had were largely in the form of individual ‘blue chip’ shareholdings, previously paying her dividends (income) in the region of £9,000 per annum. Apart from the obvious issue from an IFAs (Independent Financial Adviser) point of view of an elderly person investing into individual shares – perceived as the riskiest mode of investment – her income will approximately halve in the coming year. The reason for this, of course, is the Recession (or ‘Downturn’ if you watch BBC news programmes!). She holds many blue-chip shares such as those in the Banking sector. The Banks that were ‘bailed-out’ have largely ceased paying dividends and other companies have been equally affected, generally lessening their dividend payments. Right, 3 paragraphs in and I will get to my original point! Is there an alternative way to invest for income in this low interest rate/low dividend payment climate? This next scenario is only suitable for certain people, so please seek the advice of an IFA if you wish to contemplate such an investment. First things first: - Investments can go down in value as well as rise - Stockmarket linked investments are generally viewed as of at least 5 years in duration - You really need to fully understand the risks and product features before taking action An Investment Bond provides the potential for a person to invest in a wide range of shares indirectly. For example, an IFA might recommend a portfolio based on your personal attitude to risk, containing (say) 5 different investment funds from 5 different investment management companies. In turn, these funds may well hold many, many different shares, the fund manager allegedly providing the expertise to research and deal in these shares for their investors benefit. These funds usually have millions of pounds in them, thus being what is termed as a ‘pooled’ investment. I mention shares, but these funds may hold Gilts, cash, Fixed Interest products, Corporate Bonds, Commercial Property, etc. – dependent on their remit. The potential advantage of such a product in these fraught low savings/dividend income times is that you can take 5% income per annum, any possible tax due (largely dependent on tax status upon encashment) deferred until the Bond is encashed or after 20 years (20x5% = 100% i.e. you have had your capital returned over 20 years via the income taken). The 5% can be accumulated i.e. if you start to take income after 2 years, 10% can be taken at that point. A 5% return (income) is a good bet to be far more palatable than non-existent/minimal interest or dividend payments! There are other options that may be equally as appropriate i.e. taking the growth from an OEIC (another form of pooled investment) each year within the Capital Gains Tax (CGT) allowance threshold at that time. Both the Bond and OEIC scenario do hold their risks, though, you being charged for the investment management within the funds invested in and, if no growth is achieved above and beyond these management charges and (i.e.) the 5% income you take, then your capital value is likely to decrease. At the risk of sounding like a cracked record, please seek professional advice in relation to your own financial circumstances and preferences if you want to investigate the above investment product options. Nothing in this Blog should be construed as providing financial advice, merely descriptions of alternative (risk-inherent) investments to savings accounts and individual shares. Until next time...