In Search of Income
Is your cash struggling to keep pace with inflation?
The current low interest rates are good news for mortgage repayments but not so good if you are relying on your savings to produce an income. If you are a saver rather than a borrower, you will have noticed the interest you are receiving has fallen some way in recent years.
Emergency Fund
Savers who have seen their savings lose ground to inflation will benefit from reassessing the role of cash in their portfolios. Cash is important to meet short-term purchases and as an emergency fund – 6 to 12 months’ worth of expenditure is common. Cash deposits also work well if you’re concerned about the prospects for markets or need your money back within five years, as stock market investments are for the long term.
However, with interest rates remaining at historic lows, cash is struggling to keep pace with inflation at present, particularly after tax. Therefore it may not be wise to hold too much cash if you are able to accept that your capital and income is not guaranteed and will fluctuate in value.
Generating Income
Generating an income from your investments is often an important requirement for people who are retired or approaching retirement, those who need to supplement their salary or those with a relatively short investment timeframe.
It is important that you seek professional advice when looking to invest for income as any solution needs to take account of your existing savings and investment portfolio and your attitude to investment risk. The following all offer alternative ways of producing an income from your savings; however, they all carry more risk to your capital than leaving it on deposit.
Equity income funds – these funds invest in shares of companies that tend to pay higher dividends on a regular basis for the purpose of providing an income.
Government bonds, or gilts – because most government loan stock is considered as safe an asset as you can get, the returns are lower than corporate bonds because of the lower risk. Guaranteed income bonds – these offer a fixed income over a fixed period, usually up to five years. They often offer a capital guarantee as well, provided you hold them until maturity.
Greater Investment Flexibility
The new ISA rules also offer greater flexibility, including the option to transfer a Cash ISA to a Stocks & Shares ISA in search of a higher yield.
This transfer does not affect your annual ISA subscription but it will put your capital at risk because the value of stock market investments is not guaranteed, so you could get back less than you invest.
Interest on cash in a Cash ISA is paid gross whereas within a Stocks & Shares ISA the income is only paid gross on corporate and government bonds; on everything else, including cash, the income is paid net. You can transfer money from a Cash ISA to a Stocks & Shares ISA but not the other way around.
Social Care Costs
Keeping pace with the growing size of an ageing population…
The funding of long-term care remains one of the biggest public policy challenges facing the government. As the baby-boomer generation grows older, it is estimated that spending on social care needs to double in real terms over the next twenty years just to keep pace with the growing size of the ageing population.
In July 2010, the Commission on Funding of Care and Support was set up by the coalition to review the funding system of care and support in England. Chaired by Andrew Dilnot, it presented its findings to the government in its report ‘Fairer Care Funding’, published on 4 July 2011.
Among the recommendations in the report are:
- Individuals’ lifetime contributions towards their social care costs, which are currently potentially unlimited, should be capped. After the cap is reached, individuals would be eligible for full state support for care costs. This cap should be between £25,000 and £50,000. We consider that £35,000 is the most appropriate and fair figure.
- The means-tested threshold, above which people are liable for their full care costs, should be increased from £23, 250 to £100,000.
- National eligibility criteria and portable assessments should be introduced to ensure greater consistency.
- All those who enter adulthood with a care and support need should be eligible for free state support immediately rather than being subjected to a means test.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Although interest on your current deposits may be at an all -time low, your capital is, at least, relatively safe. Therefore before you sacrifice any safety in a search for income, you should obtain professional financial advice. To discuss your options please contact us.