The outcome of last week’s Monetary Policy Committee meeting came as no surprise, but if you’re trying to live off income generated from capital, it was still bloody irritating. Once again, base rate was left at 0.5 per cent, its lowest level since records began in 1694. Once again, it was decided that quantitative easing must continue. So annuity rates will remain at record lows; deposit rates will remain below a level worth anything after inflation and tax; the squeeze on pensioner living standards will continue; and savers will feel forced to move into riskier markets to preserve the purchasing power of their cash.
So what can you do? The first thing to note is that you don’t have to be bullied into moving out of cash. Deposit interest rates are not all bad. Banks have been having trouble attracting deposits (for obvious reasons) and have started slowly edging rates up. You can get 3.1 per cent on instant access at Santander, 3.8 per cent at First Save for a two-year fix and 4 per cent at Halifax if you tie up your money for three years. The problem with many accounts, of course, is that the financial sector is habitually mendacious: the moment your introductory deal comes to an end, they’ll slash your interest rate as close to zero as possible. Then you’ll be left with a pittance, or the trying admin of moving money to an account with a better rate — so boring in fact that most people don’t bother doing it. That’s why the average rate on instant access accounts is 0.99 per cent and on cash Isas a mere 0.6 per cent, at a time when consumer price inflation is still close to 4 per cent.
Given all this, you’ll be pleased to hear I have something of a solution for you: Governor Money (www.governormoney.com). Sign up for this and you get a single account with Governor (divided into Isa and non-Isa cash should you wish) and a single login as a client of the platform. Within the account, you will be able to deposit, monitor and transfer your cash around many different banks and building society offerings with no extra admin at all. You also receive alerts when any fixed-rate deals come to an end, prompting you to move your money on, or when any of your sub-accounts breaches the Financial Services Compensation Scheme limit. That means you can hold large sums via just one admin account, but still keep it safely in separate banks. Governor hasn’t managed to sign the big banks up (they have no reason to help you conquer the consequences of apathy) so you don’t always get the highest rates here: the best two-year fix on offer at the moment is 2.75 per cent. But their alerts system means that you should never end up with the worst rates, which is more than most savers can say.
If stocks-and-shares Isas are not your cup of tea, you’ll also want to be sure that you put as much cash as possible into a cash Isa, for the simple reason that once it is inside an Isa wrapper, any future income will come guaranteed tax-free forever (with the proviso that ‘guaranteed’ and ‘forever’ mean different things to governments than to real people).
Income in a stocks and shares Isa is another matter. It still comes tax-free (with the same proviso) but all too often it comes at a high cost in terms of both volatility and fees. With this in mind, I favour investment trusts over unit trusts. They tend to have lower management fees (below 1 per cent rather than 1.5 per cent or more) and, partly as a result of the low fees, they tend to have better performance. Over the past ten years, the average UK-based unit trust has risen in value by 53 per cent. The average investment trust has risen by 98 per cent. The average global emerging markets unit trust has risen 295 per cent while the equivalent investment trust is up by a handsome 461 per cent.
A good many investment trusts also come with unexpectedly attractive yields. The most well known of all, Neil Woodford’s Edinburgh Investment Trust, invests in large UK companies and comes with a yield of 4.4 per cent. I also like the City of London Investment Trust, which does much the same but comes at a yield of 4.6 per cent and with four decades of dividend growth behind it. Next, I have a soft spot for the well-run Troy Income and Growth Trust, which currently yields 3.6 per cent. And if you are interested in good income but also having some exposure to emerging markets, rather than just the UK, there is the JP Morgan Emerging Markets Income Trust which yields 4 per cent. The only problem with this one is that it comes with a performance fee; I hate performance fees.
Sticking with a global remit, it’s always worth looking at the Edinburgh-based Murray International Trust, run by Bruce Stout, a man whose bearishness on the future of western economies makes me look like a crazed market optimist. His fund — which usually outperforms the market by some margin — yields 3.8 per cent. Finally for those who just aren’t happy with 4 per cent any more, there is Ecofin Water and Power, which invests in international infrastructure and utilities. It is quite heavily indebted but its shares can currently be bought for 25 per cent less than their net asset value, on a yield of 5.3 per cent. That’s a good price, and the sort of deal to watch for when income is so scarce.
Merryn Somerset Webb is editor-in-chief of MoneyWeek.