The Government has set out its stall with an economic policy of higher taxes and spending cuts to deal with a colossal budget deficit. The consequence is that, to avoid further recession, the UK economy requires a very relaxed monetary policy – which is likely to mean a prolonged period of historically low interest rates.
Although government economic policy is dealing with the greatest need, it is often overlooked that the current strategy penalises those individuals who have no debt, but have accrued capital through savings and are now dependent upon the interest that can be earned from it. Although some may have delayed the pain of lower savings interest – by locking into fixed rates a couple of years ago – many of these arrangements are now maturing in an environment of meagre interest rates.
Many savers who have traditionally pursued a deposit-based (bank, building society and National Savings) strategy for their savings live in hope that interest rates will soon begin to rise again. My view is that they will have to wait a long time. Perhaps a better approach is to rethink the strategy entirely, so as to reflect the current fiscal environment.
So, what action is needed? Firstly, those dependent on generating an income from their savings have to accept that a deposit-based financial strategy is no longer a viable solution. For many, this is something of a re-education – getting away from the mindset that the only money you can spend is interest generated from a capital sum. The important thing is that your capital produces a return; it is less relevant whether this is interest or growth, as both can be harvested to provide the cash flow required.
Of course, a sufficient reserve should be held for known future capital expenditure – for instance to replace a car or pay for a holiday. There should also be a contingency fund to help deal with the unexpected. Once these provisions have been made, it is a case of considering which investment options best suit your needs.
These days, you don’t require millions of pounds in order to establish a diverse and sophisticated investment strategy; modern investment platforms, available to independent financial advisers, can provide a low-cost and effective mechanism. A lump sum investment of, say, £100,000 would be sufficient to establish a bespoke portfolio that could spread your money across all of the main asset classes – gilts, corporate bonds, commercial property, equities, commodities and so on – and some specialist asset classes, such as absolute return and gold. Your adviser could then predict a realistic average rate of return from the portfolio, to be stripped out as a monthly cashflow.
It’s important to keep the relationship between returns and amounts withdrawn under periodic review, and to make changes from time to time to reflect actual events. And, whatever you do, be prepared to think outside the box – diversify your investments and don’t suffer in silence.