FOR investors and savers, the income dilemma remains one of those elusive challenges created by today’s low interest rate environment.
Even though the Bank of England expects UK interest rates to rise ‘sooner than the market anticipates’, any progress in this regard will be very slow. Set this against the potential for inflation rates to increase over the same period and there’s precious little comfort for those hoping to see real income from capital.
The other thing to remember is that interest earned will typically be assessable for tax. If you have used all of your allowances against pension income, perhaps, then the net return will be even lower.
So what are the alternatives?
Traditionally, the Gilt and Sovereign Debt Bond markets have been a safe haven for providing Fixed Income but yields remain historically low. Plus, with US Federal Reserve talk of measures being introduced to stop a run on Bond funds, these probably don’t represent a realistic alternative at the moment.
What about the stock markets? The average yield on the FTSE 100 Share Index, for example, is currently running at around 3.4% which is not unattractive. But then, market values are relatively high at present and there’s always the concern that they may fall in the short term. Ironically, this increases the yield but if fluctuating capital values worry you, then the stock market may not be the right place either.
The common denominator here, when trying to assess alternative options, is that the view is based on a very short-term or immediate return situation. If a fund or investment option offering a one-stop-shop solution existed, it would be well advertised and you would probably be invested there already!
There is a solution, although it’s one that requires some lateral thinking and longer-term planning to be successful. This involves reviewing your resources and expenditure and identifying your income needs and when they will arise. It’s also important to consider future influences that may change any of these factors, in order to determine your needs over the medium-to-long term.
You might conclude that you will have to spend some capital in the short term to enable longer-term investments to grow before extracting income from them. You might, for example, plan to spend some capital to help meet your regular income needs; alternatively, you could purchase a temporary Annuity to provide set income for a short period.
What we’re really talking about here is taking the first tentative steps towards a proper financial planning solution. Approached carefully, it could be the perfect solution for you.