Base rate falls – where can investors find income?

Today the Bank of England has announced a new base rate cut to 0.25%.

With base rates cut to unprecedented low levels, investors are finding it increasingly difficult to achieve a reasonable level of income from their deposits and investment portfolio. Cash rates of 1.5% are the maximum that can be expected from bank accounts - below the rate of inflation if measured on the more realistic RPI of 1.6% opposed to CPI. With a further fall in sterling after the base rate decision, inflation will probably increase further due to the level of imports the UK makes.

Whilst the cut is good for homeowners and borrowers, savers are being penalised for being prudent.

With negative real returns on cash, and the prospect of absolute negative returns if banks start charging for holding cash, investors have to take risk to achieve a return. Equity income and bond funds are the two obvious places to start, but increasingly investors are having to look elsewhere.

Attractive yields are available on many assets, however areas such as bonds are looking expensive and with QE bent targeted here, they will probably get even more expensive. A weakened sterling has given a boost the the yield from the FTSE 100 as many companies declare and pay in US dollars, however on the bond front, high grade, low risk bonds are far less attractive from an income perspective. Investors are increasingly looking to other areas such as crowdfunding and venture capital trusts to achieve higher levels of income, albeit with increased risk.

Available yields

FTSE 100 - 3.85%

UK Equity Income sector - 4.1%

Typical GBP corporate bond fund -3.5%

Typical High yield corporate bond fund - 5%

Venture Capital Trusts - 5% to 9%

Whilst not suitable for everyone, more sophisticated investors are having to cast the net wider in order to generate sufficient income. VCTs is an area for consideration with tax free yields well in excess of 5% on offer. The reintroduction of quantitative easing will filter through quickly to risk assets, such as equities and bonds and will make low yielding assets even lower yielding.

Photo credit: Martin Pettitt

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