Growing Your Investment Income

If your investment goal is income, your options have broadened in the last two years. 

 

 

 

 

Source: Bank of England

If you wanted income from your capital two or more years ago, there often seemed little alternative to taking on higher investment risk to achieve your goals. The Bank of England interest rate hovered between 0.1% and 0.75% for over 13 years from March 2009. Now, for the first time in over 15 years, the rate exceeds 5%. In theory, if you want income today, you could find it from banks’ and building societies’ instant access accounts.

 

In practice, matters are not quite so simple:

• Inflation means that if you spend your interest, the buying power of your capital will be eroded. For example, £1,000 in January 2020 was worth only £823 by June 2023, thanks to inflation. Indeed, since 2009 short-term interest rates have rarely been above the inflation rate, so even if you had reinvested all your interest, you would still have less spending power in 2023. 
• Variability – there was a time in the early 2010s when it seemed interest rates were stuck at 0.5%, but rates now are anything but static. At present, there is a consensus that UK rates are close to their peak. Eventually a decline is expected and, when that happens, there will be a corresponding drop in deposit interest rates.
• Tax – unless you are an additional rate taxpayer, the income tax treatment of your interest benefits from the personal savings allowance (£1,000 for UK basic rate taxpayers and £500 for UK higher rate taxpayers). The allowance has been frozen since its introduction in April 2016. Back then a higher-rate taxpayer with a deposit earning the then Bank rate needed over £100,000 before paying 40% tax on their interest. Today that figure is less than £9,600.

 

Investment landscape

The different short-term interest rate picture in 2023 is just part of a broader changed investment landscape. This is most obvious in the fixed interest securities sector, which includes government and other fixed rate bonds.

A good example is provided by one benchmark bond, the 10-year UK government bond (gilt). In July 2021, the prospective annual return for investors who bought that bond and held it through to maturity was a mere 0.57%. It is now almost 4% a year higher. There have been similar changes throughout the bond market, meaning that bonds and bond funds are once more viable long-term income investments.

Dividend payments on UK shares and share-based funds are also higher than in 2021, because of both inflation and the recovery from Covid-19. Since July 2021, the average dividend on UK shares has risen by 36%, based on FTSE All-Share data.

If you need to generate income from your capital, the message in 2023 is clear. While higher rates on instant access deposits are welcome, there are other, longer-term investment income opportunities that merit serious consideration.

 

Review Your Financial Plan

 

To arrange an appointment, you can contact us via your usual MHA adviser, or directly on 01604 621 421 or enquiries@mhacaves.co.uk

 

Important Information/Risk Warnings

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

This is a marketing communication, for general information only, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Caves Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk. Therefore, you are recommended to seek professional regulated advice before taking any action.

Investments do not offer the same level of capital security as deposit accounts. The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.