You have worked hard to build up a nest egg to see you through your retirement but in these times of volatile stock markets and record low savings rates it is difficult to see where you can earn a decent income.
In 2007, someone who had £50,000 could stick it in a High Street account and take £3,225 a year income – worth £2,580 to basic rate tax payers. Today the same £50,000 pot earns no more than £1,060 a year after tax – cutting the payout by more than half. This has left savers who need to boost their income with only option: they must take more risks with their money.
There are two main types of investments that deliver a stream of income: bonds and shares. We will look at these each in turn.
The economy has dipped in and out of recession twice since 2008 but the stock market has been on an overall upward swing, albeit with its fair shares of bumps along the way. The economies of UK and Europe look sluggish at the moment, however many of the companies listed on the London Stock Exchange have absolutely no business interests in the UK or Europe. What most investment managers are telling their clients is the role dividends play in contributing to investment returns. Savers who buy individual shares receive these dividends directly however you can also put your money in a fund that holds around 50 different companies. This cuts the risk by softening the blow of one firm seeing a sudden fall in its price. You may want to look at an equity income fund where the manager looks to invest in solid companies that sell the sort of goods customers always want or need, such as mobile phones, prescription drugs, cigarettes and bank accounts. These companies are often rich in cash and are therefore able to pay healthy dividends. Over the past year, equity funds invested in the UK have delivered an average yield of 4.89%, according to data analyst Morningstar. You may also want to add a little global or emerging markets funds to your portfolio. In Asia, for example, dividends are shooting up.
Investors effectively loan money to a company or government for a set period of time and in return are paid a set rate of interest. Their money is returned in full at the end of the term. Holders of bonds have priority over holders of equity. If there is a choice between paying an income to its bondholders or its shareholders, a company is obliged to favour the bondholders. A price you may pay for that is as the name of the asset class suggests, a fixed income which will not grow in the way that an investor hopes the dividend from a share will. Bonds issued by the safest governments (like Germany,the US and Britain) are currently in demand, their prices are high and as a consequence the yields they offer investors are low, less than 2%. By contrast, you can buy bonds issued by the safest companies such as Tesco on a yield of more than 5%. The average is about 4% in the UK today. Companies with less robust balance sheets or worse prospects offer bonds with higher yields still, compensation for the fact that a greater proportion of these companies will fail to pay the income or return the capital they have promised to. One way of getting exposure to bonds is via a fund which is actively managed by a fund manager. This is much safer way to invest as the risk is spread and you are not exposed to just one or a handful of companies that could go bust.
The consensus may be that sluggish growth in developed economies of Europe and US is here to stay however by investing in a diversifed range of cash and investments, income can be achieved.