Investment ideas for income that currently beat inflation and yield 5% pa or more

There are many challenges facing people who have historically relied on interest from their savings. This is particularly true for people in retirement on fixed incomes, where cost of living increases are making it increasingly difficult for many people to maintain their living standards.

The effect of price increases

The impact of increasing prices can be seen when looking back over the last 10 years. A good way to think of price inflation is to think of a shopping basket containing goods and services which people in the UK typically spend their money on. As the price of items in the basket change over time, so does the total cost of the basket.

Based on data from the Office of National Statistics, it’s clear that the price of some of the items in this ‘basket’ have increased significantly over the last 10 years. For example, the price of a loaf of white bread has more than doubled in the last 10 years. An average litre of petrol cost approximately 74p in 2002 – today the average price is closer to £1.30.

While private sector salaries have increased over this time by approximately a third (source: NSA – total private sector pay, March 2012), times are challenging for those on fixed incomes or those relying on their savings to generate above inflation returns. The last few years have been difficult in this respect as interest rates have plummeted. While income seekers might historically have enjoyed the extra financial benefits offered by high income investments, growing numbers of people – particularly those who have retired and have a fixed amount to live on – are looking for extra investment income just to cover the costs of everyday living.

Retirement savings at risk

With many savings accounts now paying less than 2% at a time when the current rate of retail price inflation is closer to 3%, many pensioners can only stand by and watch as the value of their hard-earned cash savings is eroded in real terms. What are the options for cash savers?

Firstly it is imperative you are getting maximum value out of your savings provider and if you are not you should consider looking elsewhere for a better home for your cash. Gone are the days when moving accounts was a long drawn out protracted process. Many savings providers make it easy to transfer from an existing savings account to a new provider and will often help you with the process. However for savings plans that have fixed terms check with your provider to understand any charges or lost interest you may incur before moving your money. For cash ISA plans you can transfer to a new cash ISA provider – see our cash ISA transfer guide to help you through the steps to do this. Bear in mind that there may be a charge for switching ISA provider.

If you are prepared to take on board some risk to your capital then there are investment related options available to you which offer the prospect of a higher yield on your cash.

Income plans could help beat inflation

Given the current issues facing those who rely on savings interest to get by, highlighted below are a number of income investment ideas that aim to provide a yield above 5% pa.

Remember, however, that investment products carry varying degrees of risk. As with any new savings or investment plan, it’s a good idea to seek independent financial advice before committing to a particular investment product.

Income Investment Funds

An investment fund is a collective investment scheme that pools investments in a range of areas such as cash, shares, bonds or other assets. Individual investors buy either units or shares, depending on whether the fund is a unit trust or an open-ended investment company (OEIC). These entitle them to a share in the overall performance of the fund.

An investment fund is organised by a fund manager and a typical income fund will invest in 60 to 100 companies. Funds often focus on one particular area – for example, a specific geographical region, a specific goal (e.g. income or growth), or a specific type of industry sector (such as technology). There are various types of funds available such as emerging market funds (which focus on up and coming economic regions such as China and India) and ethical funds (which invest only in companies that meet certain ethical criteria).

For income seekers there are a range of different types of investment fund that focus on income. We have picked three income funds below that may be of interest to you.

Investments funds are capital at risk products, so it’s a good idea to get independent financial advice if you’re new to investing, or are at all unsure about which fund type to choose.

Standard Life Higher Income

• Yield 6.78% (variable, not guaranteed)
• Income paid quarterly – January, April, July, October

With a current effective yield of 5.98%, this fund aims to provide a significantly higher level of income than is generally available on gilts. This is achieved by investing mainly in Sterling and Euro denominated sub-investment grade corporate bonds.

Fund manager David Ennett and his investment team actively oversee the fund and may also invest in other bonds, such as investment grade corporate bonds and government bonds, if and when they spot good opportunities in these areas.

Find out more about the Standard Life Higher Income Fund >>

Invesco Perpetual Monthly Income Plus

• Yield 5.5% (variable, not guaranteed)
• Income paid monthly

The Invesco Perpetual Monthly Income Plus Fund aims to generate income on a monthly basis, and offers a varied investment portfolio – at least 80% is invested in bonds, with the remainder (up to a maximum of 20%) invested in UK equities.

Managed by Paul Causer, Paul Reed and Neil Woodford, the fund benefits from their collective expertise in both the fixed-income and equities markets. The fund aims to achieve a high level of income alongside a maximum total return, via investment in high-yield corporate and government bonds as well as the aforementioned equities.

Find out more about the Invesco Perpetual Monthly Income Plus Fund  >>

Newton Higher Income Fund

• Yield 5.4% (variable, not guaranteed)
• Income paid quarterly

The Newton High Income Fund focuses on achieving an inflation-beating income yield while maximizing the prospects for long term capital gain. With a largely UK-based portfolio, the fund is managed by Paul Wilmott. He and his colleagues aim to invest primarily in companies yielding over 115% of the FTSE All-Share Index as well as aiming to purchase companies yielding above 120%. Correspondingly, companies that fall below the Index will be sold – a strategy aimed at achieving high income in the short term, along with long-term growth.

Find out more about the Newton Higher Income Fund here >>

Investing using a Fund Supermarket

By using Fair Investment’s Fund Supermarket you can save up to 20% on the Annual Management Charge (AMC) levied by many fund managers. This rebate is paid into a cash account which is set up for you when you first invest.

To find out more about the Fair Investment Fund Supermarket, click here >>

Income yields quoted are correct as at 20th June 2013.

This website contains information only and does not constitute advice or a personal recommendation in any way whatsoever. The value of investments and the income from them can fall as well as rise and you may not get back the full amount invested. The tax efficiency of ISAs is based on current tax law and there is no guarantee that tax rules will stay the same in the future. Past performance of a fund is not a guide to its future performance.

Different types of investment carry different levels of risk and may not be suitable for all investors. Please ensure that you read the Important Risk Information applicable to each fund. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment and should read the product literature. 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.

Written by Editorial Team ,
20th June 2013