When the Bank of England slashed interest rates to 0.5% in March 2009 it was intended to be a temporary measure to stimulate the economy in the immediate aftermath of the financial crisis. At the time few predicted rates would stay so low for long - indeed a poll of 60 analysts conducted by Reuters found them expecting rates to start rising again within a year.
Those hoping for an increase in rates are likely to remain disappointed. The Bank of England's Funding for Lending Scheme allows banks to borrow money cheaply, so they have less need to attract deposits from savers and have dropped the interest rates they offer. Furthermore the latest money market predictions suggest that interest rates are unlikely to rise above 0.5% until the summer of 2017 - another four years away. Last week the Deputy Governor of the Bank of England, Paul Tucker, even suggested negative interest rates should be considered. This would mean the central bank charging banks to hold their money for them, the idea being it will encourage them to lend more to individuals and small businesses.
In reality savers are already experiencing negative real returns. Retail price inflation currently stands at 3.3%, so a higher rate tax payer needs to earn 5.5% on their savings just to keep pace - entirely unachievable today. If inflation remains at current levels the purchasing power of cash will halve over the next 22 years.
What are the options for those seeking higher returns?
For those prepared to take some risk with their capital, higher returns are attainable. Many UK companies are in good financial shape, paying record dividends to shareholders over the last year. As dividends rise, so could share prices, so investors in these companies could enjoy capital growth as well as a rising income, although, unlike cash, stock market investments are not guaranteed so the capital and income will fluctuate in value and you could get back less than you invest.
Our favourite way to gain exposure to these kinds of businesses is through an equity income fund. This sector is home to some of the finest managers in the UK, and one of our favourites, the Invesco Perpetual High Income Fund, has recently reached its 25-year anniversary. Impressively it is not just the best performing fund in its sector over this period, it is the best performing of any fund investing in the UK since it launched on 6 February 1988, although please remember past performance isn't a guide to future returns.
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We believe it could be an excellent time to consider investing for the long term. The manager Neil Woodford believes the price of pharmaceutical companies, a major constituent of his fund, represents the biggest valuation anomaly he has seen in his entire career. He is sometimes early in making these big calls, but history has often proved him correct. Those investing today can enjoy a starting yield of 3.7% (variable and not guaranteed) with no further tax to pay if held in an ISA or SIPP.
If you are considering an investment please ensure you read the fund's Key Investor Information Document which contain details on the risks involved.
Please note tax rules can change and any benefits depend on your personal circumstances.
The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.