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Kirk Rice Blog

Income InvestmentWritten on September 10, 2019 by Kirk Rice LLP

Income Investment
Financial Services Questions

The Question:

Where can I earn a decent income on my money, with interest rates said to be falling and NS&I has closed the guaranteed bonds?

Kirk Rice LLP answers:

I understand your concerns on investment income and feel an explanation of the background to such decisions is needed.

The Treasury uses National Savings & Investments (NS&I) to raise money for government spending and provides the 100% money-back guarantee, which makes this a favourite recommendation from financial advisers for cash holdings. You are usually covered by the Financial Services Compensation Scheme for £85,000 per person per deposit taker and temporarily for higher amounts, if you can meet the conditions (click here)

After the financial crisis, the government used NS&I to raise money offering a range of products, along with the wholesale markets by issuing GILTS. However, the wholesale market is the cheapest option, so NS&I needs to reduce the inflow of money as it is costing the Treasury to hold deposits. You’ll have noticed this in the retail banking sector in the unattractive interest rates on cash compared to pre-2008.

NS&I offers a competitive Junior ISA at 3.25% tax free on up to £4,368 (2019/20). There would be room for that to be cut as it is above all the mainstream banks and building societies. The Direct Saver account offers savers 0.90% on up to £1m, which could be bettered by many providers, but without the 100% guarantee.

Note that if you have Guaranteed Income or Growth Bonds, you will still have maturity options. If you renew, remember that you cannot cash the new Bond in until the maturity date. This differs from the current terms, which allows you access with a loss of 90 days interest.

A recent change is that any adult can buy premium bonds for any child as a gift. The child’s parent or legal guardian must manage the account.

Given that most financial analysts cannot predict the future, you should read widely to make your own mind up about the value of the NS&I 100% guarantee in today’s economic climate. Here is some of what I have read and believe you should consider:

Long term trends show that most investment returns (shares, bonds, and cash) are predicted to continue falling, which has been true since 2009. Although Brexit plays a small part in an investors’ globally spread portfolio, there is a general view that in the UK we will see increased inflation because of the relatively weak currency. Foreign companies will gladly supply goods to the UK because they make more profit compared to prior to the Brexit referendum.

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Whatever Brexit deal is arranged it is anticipated there will be increased costs passed on to the end user so expect prices of imported food and goods to rise.  This could incentivise British suppliers to provide alternatives as they will be able to charge more and remain competitive (in theory at least). We expect inflation to be over 3% pa in the coming 12 months, whereas we have been experiencing average inflation at 2.8% pa for 20 years.

In equity markets, money has moved out of shares into Bonds and Gold.  It is this movement to Bonds that means governments and companies can borrow cheaply. To have a higher interest rate on Bonds, you must take more risk, perhaps lend to governments like Argentina (which has previously defaulted on bonds) and companies that may suffer first in a recession (e.g. luxury goods, housebuilders and hotels) and hope they do not go bust.

Income investors are inextricably drawn to taking risks and often buy shares in dividend paying companies (e.g. tobacco; banks, pharmaceuticals) that are globally dominant and cash generating. If central banks cut interest rates further to prevent a long global recession, being in shares like this could pay off in the long term.

What about property as an alternative income investment? Commercial property income is higher than interest rates in many countries, and most portfolio investors will have some money in this type of asset. The income is thought to be more reliable than dividends, as companies are tied to long leases. Property values rise when interest rates fall; however, in a recession, empty buildings become a burden and company bankruptcies of tenants will impact your income.

Advisers usually utilise open-ended investment funds to access different asset types and benefit from a diverse pool of suitable investments in each group. Funds allow you to choose when to buy and sell with costs spread across all investors.

Therefore, I suggest you think about your immediate cash needs (what are you likely to spend over say the next 3 years) and make sure this is held within institutions that qualify for the FSCS £85,000 compensation and NS&I for the balance above this. Thereafter, you need to assess whether you need to take any risk with the balance of your wealth to beat the impact of inflation.

As always, I recommend you consider independent financial advice to assist you when considering income investment options.

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Any reader interested in getting some help with their income investment options, should email info@kirkrice.co.uk to arrange a call with one of our financial planners.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. The FCA does not regulate tax and trust advice.