Retirement Income Alliance

Three income options for your pension or ISA this tax year

by Darius McDermott, Managing Director, Chelsea Financial Services 8th March 2017

This week marks the eighth anniversary of rock-bottom interest rates. They had been steadily falling in the UK for about a year and a half, but March 2009 was the month Marvin King, the then-governor of the Bank of England, reduced interest rates to an emergency level of 0.5%.

Since then, the interest rates on cash accounts have continued to fall and prudent savers have seen their purchasing power reduced, as inflation has slowly but surely eaten away at their savings.

According to Moneyfacts, the average cash ISA account is now a measly 0.82%, with some offering as little as 0.01%. So it's not surprising that the search for income has intensified and investors have had to look further afield and take on more risk to achieve their income goals. In effect, they have had to forego the capital security of cash for the potential for higher returns.

So as we head into the final stages of the tax year and investors around the UK are looking to use their pensions and ISA allowances before they lose them, we take a look at three other income options.

1. Bonds

Bonds are basically loans issued by companies or governments. In return for the loan, they will give you regular interest payments. As with any loan, there is always the risk that the company or government won't pay you back your original investment, or that they will fail to keep up their interest payments. The riskier a bond is deemed to be, the higher the yield usually is, as the company or government needs to compensate investors for the risks they are taking.

There are thousands of bonds available, so investors may find that it's much more straightforward to buy a fund that invests in bonds. This has two main advantages. Firstly, your money is combined with investments from lots of other people, which means it can be spread across a range of bonds in a way that you couldn't do if you were investing on your own. Secondly, professionals are researching the entire bond market on your behalf.

Funds we like in this area include Aviva Investors High Yield, Fidelity Strategic Bond, Invesco Perpetual Corporate Bond and Standard Life Investments Emerging Market Debt.

2. Equities paying a dividend

When companies have surplus cash they have a number of options: reinvest in the business, buy another company or asset, or return some of that money to shareholders in the form of a dividend. Ideally, a company will be doing all three at appropriate times. But for income investors, it's the dividend payments that could be of interest.

Some funds invest specifically in companies that have a history of paying a dividend, in companies with a growing dividend or in companies the manager believes will soon start paying a dividend. This may be because it is seen as a good discipline and shows the company has the shareholders' interests in mind, or it may simply be because that fund is designed to provide an income to investors too.

While UK companies have a very good reputation for paying dividends, we are not alone and you can find companies all around the world who do the same.

Funds we like in this area include Artemis Global Income, Charlemagne Magna Emerging Markets Dividend, Lowland Investment Trust, Royal London UK Equity Income and Schroder Oriental Income.

3. Multi-asset income

Another option is to look at a multi-asset income fund. These funds invest in lots of different kinds of assets that produce an income – from bonds and equities through to property, infrastructure and 'alternatives'. The beauty of choosing a fund that invests in all these things is that not only is the manager finding income for you, but they are also diversifying your income stream so that you are not too reliant on any one investment.

Funds we like in this area include Jupiter Merlin Income, M&G Episode Income and Premier Multi-Asset Monthly Income.

Until interest rates have risen significantly, it is hard to make the case for cash (especially as inflation is rising) unless you need your money soon. But, as you can see, there are plenty of other income options, as long as you are willing to take on some more risk.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice. The contents of this blog should not be considered advice or a personal recommendation. Always consult your adviser before making any investments.