Higher Income Returns

Interest rates in the UK are at 300 year lows, thanks to “government” and Bank of England meddling. Strangely economic stagnation and recession are endemic now, and this is not likely to change. For a clue on what they should be doing do a search on Sir John Cowperthwaite.

Many people have their savings in banks earning very little interest, even if it is a significant sum held on a term deposit. Maybe at best you get say 3%, perhaps not. Bear in mind that is roughly where the RPI inflation rate is, so your savings may be diminishing in “real” inflation adjusted terms. Furthermore your savings may not be as safe as you think they are. There are plenty of insolvent “zombie” banks in the UK and elsewhere, and there has been an abrupt confiscation of deposits as in Cyprus and Spain.

In order to get a better return you need to look outside the banking system. Be aware that all savings have risks. Be aware of those risks and look before you leap. I outline two routes to get better returns for your savings.

Fixed Income Investments (Bonds)

A fixed income investment is a loan which is issued by an entity (government, company, other) which usually has a fixed rate of return. Income is usually paid out annually, and upon maturity if the issuer is solvent the bond gets repaid. Most bonds can be sold at any time at the prevailing price in the market which may not be what you paid for it.

Notes:

Only buy good quality bonds issued by a solid entity. Governments default and companies go bust.

Only buy bonds with a set maturity date. Anything more than 10 years is risky. Bonds with no maturity date are the most risky.

Consider index linked bonds, government and corporate issues exist.

When interest rates rise bond prices will fall. Short dated bonds close to maturity will be less susceptible to interest rate moves as they are close to repayment. Long dated issues can see dramatic price falls, be aware of this.

To buy bonds it is cheapest to do so through an online broker. Buying costs are likely to be about £10. Be aware that some online brokers charge administration or custody fees, avoid them.

Buy a spread of issues with a range of maturity dates (this is called laddering)

Online resources:

Fixed Income Investor is a reasonable resource and you can look through the choices for government (gilt) and corporate issues. There are also sections are for index linked issues.

The London Stock Exchange has a resource which provides more information on issues and also had a “Advanced” search section to help you weedle out ideas.

Peer To Peer Lending

This is a relatively new idea. Essentially lenders provide money to businesses or individuals via an intermediary at agreed rates. Due to this there is greater risk of default, but returns are higher. To reduce the effects of defaults spread your lending.

I suggest you take a look at Funding Circle which is a peer to peer business lending entity.

Also while you are on the site take a look at the businesses you can lend to in the Marketplace which are from a wide section of industries and of varying quality. I suggest you lend no more that 1% of capital to any business and vet each business, longer established ones preferred.

 

Chezphil Emporium