Investments to supplement income when inflation is high Go compare with our comparison table

Investments to supplement income when inflation is high

31 March 2011 / by Paul Dicken

The official rate of inflation hit a two year high of 4.40 per cent in February with the expectations that inflation will remain between four and five per cent in 2011, presenting a major hurdle if you are looking to supplement your income with your investments.

Looking for inflation-beating savings has been an increasingly difficult task, but there are some competitive products available, including alternative cash ISA options.

The inflation impact

Retirement income specialists MGM Advantage estimate that a household with annual expenditure of £35,363 now needs to spend £1,496 more to maintain the standard of living from a year ago. For households where the main occupant is aged 65–74, the company estimates that £934 more is needed to keep up the same lifestyle compared to a year ago.

Sales and marketing director at MGM Advantage, Aston Goodey, said: “The price of goods is rising at an alarming rate and coupled with the fact that people are living much longer, means many people in retirement are finding it more difficult to survive financially.”

The director general of Saga, which provides services and products for the over 50s, Dr Ros Altman has been critical of the government’s failure to do more for pensioners suffering from the impact of high inflation and the historically low official interest rate, which has been 0.50 per cent for two years.

“Savers are being punished, borrowers are benefitting, but we will all lose in the end:  As savers' spending power is being eroded, they will cut back on their consumption, which will hurt everyone.  Those who are over-borrowed will need to pay back debt, rather than keep spending, so if we keep causing problems for savers, growth will suffer and we will all lose,” she said recently.

Fixed Rate Cash Income options

A five year fixed-rate deposit account from Scottish Widows Bank currently offers 4.50 per cent interest for minimum deposits of £10,000. This is a long term deposit account that will pay 4.50 per cent (gross/AER) annually, 4.43 per cent (gross) quarterly or 4.41 per cent (gross) monthly. It is one of the only accounts around at the moment that exceeds the current rate of inflation.

Interest rates will rise at some point from the 0.50 per cent level, and that will have an affect on the rates offered by savings accounts, but there is considerable uncertainty over when that might be.

Others, such as the independent government spending watchdog, the Office for Budget Responsibility (OBR), believe the rate of inflation will fall into 2012.

Cash ISA income options

Some of the conventional fixed-rate cash ISAs – where returns are free from income tax – that have come onto the market for the end of the tax year are offering three per cent interest and above. For example, NatWest’s 3 Year Fixed Rate Cash ISA offers 3.70 per cent (gross/AER) annual interest on deposits of £1,000 upwards.

Other cash ISA options include structured deposits, which offer similar capital protection to deposit accounts but generally have returns that are not guaranteed. Structured deposit plans offer competitive returns but in most cases these returns are dependent on the performance of a related index, such as the FTSE 100.

The Investec FTSE 100 5 Year Deposit Plan, available as a cash ISA, offers a potential return of 35 per cent over the five year term of the plan. The return is dependent on the performance of the FTSE 100 and the ability of the deposit taker – Investec Bank in this case – to repay investors.

The capital invested is protected, also dependent on the ability of the deposit taker to repay the money held, and the plan is eligible for the Financial Services Compensation Scheme (FSCS) deposit protection scheme, covering individual savers in the event of an institution defaulting to the limit of £85,000 per person, per institution.

Income investments

If you are happy to accept some risk to the capital invested, there a various income investment options available.

Structured investments offer the potential for defined levels of return based on the performance of the FTSE 100. For example, the Royal Bank of Scotland (RBS) UK Fixed Income Plan 1 is a five year structured investment that offers 6.25 per cent annual income dependent on the performance of the FTSE 100 Index and RBS to repay your money.

Investment funds

Funds that aim to provide investors with a level of income are funds investing in government and corporate bonds, and funds investing in equities (stocks and shares); some funds will invest in both types of asset.

There is a wide range of options to choose from, with some funds providing the opportunity for income and capital growth. Funds that have proved popular with ISA investors in the run-up to the end of the tax year are multi-manager funds: the Jupiter Merlin Income Portfolio and the Henderson Multi-Manager Income and Growth Fund.

Both funds invest in shares, and corporate and government bonds, via a selection of other investment funds and have quarterly yield distribution dates.

Another popular fund that invests directly in both bonds and equities is the Invesco Perpetual Monthly Income Plus Fund, which aims to provide an income and some capital growth by investing in high yielding corporate and government bonds and UK-listed company equities.

No news, feature article or comment should be seen as a personal recommendation to invest.

Different types of investment carry different levels of risk and may not be suitable for all investors.

Some structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated, in which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term.

In relation to structured investments and investment funds, both the value of investments and income from them can fall as well as rise and you may not get back the full amount invested.
 
Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

© Fair Investment Company Ltd

Investing For Income
 Product NameISA OptionIncome YieldMore Info
Income Maximiseryes
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Seeks to achieve a target yield of 7% to generate a quarterly income, whilst offering the potential for some long-term capital growth. Save 100% on Initial Charges.
Monthly Income Plus Fundyes
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Popular monthly income fund that aims to achieve a high level of income whilst seeking to maximise total return through investing in high yielding corporate and Government bonds, together with UK equities. 100% discount on initial charges.
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Strategic Bondyes
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Investing in higher yielding assets which will include most types of fixed interest securities, this fund aims to deliver a quarterly income to investors. Save up to 97% on Initial Charges.
Invesco Perpetual Corporate Bond Fundyes
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This highly popular investment fund aims to achieve a high level of overall return with relative security to capital. Income Paid to you twice yearly. Up to a 100% Discount off the Standard Initial Fund Charge.
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Artemis Income Fundyes
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One of the leading UK Equity Income Funds. The Fund managers hunt out companies with strong free cash flow and solid balance sheets. Income is paid to you twice yearly. 100% Discount off the Standard Initial Fund Charge.
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Invesco Perpetual High Income Fundyes
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One of the UK's most popular income funds, the Invesco Perpetual High Income has delivered consistently good long term returns through a variety of market conditions. Income is paid to you twice yearly. Up to a 100% Discount off the Standard Initial Fund Charge.
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M&G Corporate Bond Fundyes
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The M&G Corporate Bond Fund is a conservative ‘blue chip’ sterling fund that aims to produce a higher return than UK government bonds. Income is Paid to you Quarterly. 100% Discount off the Standard Initial Fund Charge.
Jupiter Merlin Income Portfolioyes
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The Jupiter Merlin Income Portfolio fund aims to achieve a high and rising income with some potential for capital growth. Income Distributions are made to you quarterly. 95% Discount off the Standard Initial Charge.
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The value of investments and any return from them can fall as well as rise and you may not get back the full amount invested. Please ensure that you read the Important Risk Information below.