The Income Challenge

The Income Challenge

06 September 2011 / by Oliver Roylance-Smith

The current economic environment for those seeking income from their capital is one of the most challenging ever seen. We take a look at the current options available as well as some of the more popular solutions.

The future landscape is bleak

The economic landscape of persistently low interest rates, increasing inflation and stock market volatility is unfortunately all too familiar, and worse still looks here to stay. Combined with lower incomes, reduced retirement provision and an increase in the cost of living, those affected most are savers and investors seeking income.

With the backdrop of this challenging environment, it is more important than ever that all options are considered carefully. So what are these options and where do you start?

To risk or not to risk

This is an important consideration – are you happy to consider some risk to your capital or is the return of capital at the end of the investment term of prime importance?

Potential returns generally increase with the more risk you are prepared to take. However, this must also be considered in the context of the current economic conditions, particularly the effect inflation can have on the real value of your money.

Capital protection

If capital protection is top of your priority list and you are prepared to tie up your money for a set period of time, there are two main options available.

Fixed rate bonds offer a choice of terms, generally between 1 and 5 years in length. Current rates include 3.45% fixed for 1 year from Vanquis Bank and 4.25% fixed for 5 years from Scottish Widows. However, with the annual Retail Price Index for July at 5%, these plans do not currently offer any protection against inflation.


The other option to consider is structured deposits. These offer the safety net of capital protection combined with the potential for higher returns than traditionally available from fixed rate bonds.

This return is normally dependent on the performance of an Index, such as the FTSE 100. A popular example is Meteor's Income Deposit Plan which offers an annual income of 7% provided the FTSE stays between 4,250 and 7,250 each year. Although the income is not fixed, the potential income on offer is far greater than fixed rate alternatives.

Higher returns

For those prepared to accept some risk to capital, there is a wider range of options available and this is where the higher potential rates of return can be achieved. Inevitably this involves exposure to the stock market and apart from investing directly in shares or bonds, there are two main ways to invest.

Defined returns vs investment funds

Structured investments offer a defined return for a defined level of risk. The benefit of this type of plan is that you know at the outset what has to happen for you to receive the stated level of income and the return of your capital.

The Royal Bank of Scotland currently offers 6% fixed for six years through their UK Fixed Income Plan with the return of capital dependent on the FTSE being higher at the end of plan that it is at the start – this is the trade-off for receiving a fixed income far higher than is available through a fixed rate bond and currently at a level over and above inflation.

Investment funds are another way of providing a healthy yield but you should remember that the income paid is variable and your capital is also at risk. However, you can choose the frequency of any payment (from monthly to quarterly) and the current yields are high, some in excess of 7% such as Schroder’s Income Maximiser fund.

Market volatility

Stock markets are volatile by nature; the level of an index or share can fluctuate significantly over short periods. This means you can invest in a market at high or low levels within the overall trend, which will of course impact on the overall performance of your investment.

Funds provide you with all the highs and lows, whereas a structured product defines at outset the risk you need to take in order to achieve the predefined returns.

Fixed rate bonds selection »

Capital protection alternatives »

Investing for income »

No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment please contact us for advice.

The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. 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. The past performance of the FTSE 100 Index is not a guide to its future performance.

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