investing for income
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- 1. Investing for Income
- 2. Six years of low interest rates has been a painful grind for many cash savers who used to rely on the interest paid to provide an income. It is not hard to see why in the past, holding money in cash savings accounts was a reliable way to generate an income. In January 1990 the Bank of England base rate was 15%, in January 2000 it 5.75% and by 2010 it had dropped to just 0.5%, the rate it is today. The base rate determines the rates of interest paid to savers as well as that charged to borrowers, so whilst in the past holding large sums in a savings account may have made sense, in light of the low interest rates today, doing this without considering the alternatives may be short sighted. So what are the alternatives? The alternatives are mostly investment based. This means putting some of the money into stock market linked, or as they are sometimes called, asset backed investments.
- 3. Many people who have only held cash savings can feel nervous about the idea of doing this. What they may not have considered is that there are a range of different investment types available, some which take a high level of risk but can offer the potential for high rewards or gains and those that take a more cautious approach but will more likely provide lower returns (returns that have the potential to outperform 1-2% interest currently paid on cash savings). The key to moving your money away from cash savings in search of better returns is to speak to a financial planner. They can help you to build a portfolio of investments which meet your income needs, whilst only taking the investment risk that you feel comfortable with. Finding the right balance of investment risk is important as should be based around how much tolerance you have to the possibility of the value of your initial investment falling if the stock market dips.
- 4. This can also determine which investment products you choose. Often those who are looking for a very cautious introduction to investing can choose to put some of their cash into products like gilts. Gilts are bonds offered by the government which offer a fixed return after a set amount of time, as well as an interest paid whilst you hold the investment. As gilts are government backed, they are often considered as a lower risk investment class. There are also guaranteed investments which, as the name suggests, guarantee the return of capital; however returns are lower than other investments because of these built in reassurances. The good news for first time investors is that you dont have to hold all of your money in investments; in fact it is better to hold a proportion in cash savings too. Your financial planner will help you to work out how much money you need immediate access to, how much can be invested over the medium term (five to ten years) and the amount that you are unlikely to need to access for the long term. Your money can then be appropriately invested based on your individual needs and the chosen time frame.
- 5. What is important is to consider the facts. The Bank of England base rate has been held at 0.5% since March 2009 which in turn has meant that interest rates paid on cash savings has languished around the 1-2%. Mark Carney, Governor of the Bank of England has said that interest rates will rise in the future, but that he expects the process to be gradual and would expect the degree increases to be limited*. With this is mind, if you have savings which need to provide an income or if you are not expecting to need to access the money for at least five years, considering the investment options which are available could be a sensible financial planning approach.
- 6. To speak to a Wealth Planner at Sanlam about investing for income, or to look at the options for an investment portfolio to suit your circumstances email [email protected] *www.bankofengland.co.uk/boeapps/iadb/Repo.asp *http://www.bbc.co.uk/news/business-26523995 This article is for information purposes and should not be treated as advice. Individual circumstances should always be considered prior to purchasing any financial products. For further information please contact your Wealth Planner. Sanlam is a trading name of Sanlam Wealth Planning UK Ltd (Reg. in England 3879955) and English Mutual Ltd (Reg. in England 6685913). English Mutual Ltd is an appointed representative of Sanlam Wealth Planning UK Ltd which is authorised and regulated by the Financial Conduct Authority.