As one BBC reporter put it, Mark Carney, the governor of the Bank of England, has ‘ripped off his shirt.’ With the economy sliding after the vote to leave the European Union in June, last week the Bank took action to stimulate the British economy and get things moving again.
Another round of Quantitative Easing, where the Bank buys up government debt to lower the cost of borrowing, as well as a new funding scheme to provide extra finance to banks are two of the measures Mr Carney has taken. But undoubtedly, the biggest headline was the action every saver has dreaded - a cut to the Bank of England base rate of 0.25%, from 0.5% to 0.25%.
Low savings rates have had a devastating impact on the returns you can get from your cash savings. According to financial analysts Moneyfacts, there have been 1,128 cuts to savings rates in 2016 alone, and just 127 rate increases. The average instant-access savings account currently pays 0.65% - that’s 65p in every £100 you save.
With inflation (as measured by the Consumer Prices Index, or CPI) currently running at 0.5%, people relying on their savings to generate an income could soon find that they are actually losing money in real terms if the 0.25% cut to the base rate is passed onto savers earning the average rate. So where can you turn to get a healthier rate of growth on your savings?
Moving up the risk ladder
Over the weekend, I spoke to the Times about the steps people can take to get their money working harder in this new era of super-low interest rates, and how savers who have steadfastly stuck to cash over the years may need to take on some additional risk with their money on the stock markets to deliver the kind of income they need. For many, this will be their first foray into the stock markets - some 81% of over-65s with an ISA hold their savings in cash.
So what are your options if you’re turning to the stock markets for the first time? Here are a few essential things you need to consider.
If you want immediate access to your money, the stock markets might not be the right place for you to invest. It’s generally advised that you have a period of five years where you won’t need to cash in your investments. After all, when you invest your money, it can fall in value as well as rise. When you have a longer time horizon, you give investments a greater opportunity to recover from any losses.
Drip feed your money
If you feel uncomfortable putting your entire nest-egg at risk, you can regularly drip feed your money in to the stock markets on a monthly basis, taking tentative steps to see the potentially higher returns the additional risk you’re taking can generate. With Saga Investments Online, for example, you can invest as little as £50 per month.
One of the advantages of this is that you benefit when markets are falling, buying investments when they are less expensive. This removes the need to try and time the market, and means you can make a greater profit when markets rise. Of course, in rising markets, you may buy investments at higher prices, but monthly investing is one way to potentially smooth out the volatility of the markets.
Consider investing in funds
Investment funds are a great way to start your investment journey. They are a simple and relatively inexpensive way to get invested in the stock markets. Rather than going out and selecting individual shares on your own, you instead pool your money with other investors, and hand it over to a professional fund manager, who chooses where to invest on your behalf. These are called ‘active’ funds. They can buy shares, bonds or other types of assets, depending on what the fund is looking to achieve.
Some funds focus specifically on generating an income, by buying shares or bonds paying dividends or interest on a monthly or quarterly basis.
Fund ideas to generate an income
For first time investors, choosing from a universe of more than 2,000 funds can be daunting. How do you know the good ones from the duds? Well, Saga Investment Services has a simple solution – the British Enhanced Income fund.
The British Enhanced Income fund invests in a mixture of equity income funds – those that look to generate an income from company shares that pay regular dividends – and bond funds that pay interest, as well as property funds that generate rental income. We’ve built the fund with the purpose of generating a healthy, regular income, which aims to deliver a yield of 4% per annum.
The British Enhanced Income fund, as the name suggests, is primarily made up of British assets. And in a low-interest environment, this is a good thing – British companies can borrow at lower rates to invest in their businesses and grow, make more profit and pay bigger dividends, which potentially means more income in your pocket.
If you are looking to make a healthy income on your money in these times of record-low interest rates, we believe it’s an excellent choice. Click here to invest in the British Enhanced Income fund now.
Key features of the British Enhanced Income fund
- Annual management charge: 0.75%
- Ongoing charge figure: 1.43%
- Yield: 4%