How much lower for longer?

March 2016 marked the seventh anniversary of a 0.5% Bank of England base rate, but other interest rates are still falling. 

"Lower for longer" is now a commonly used phrase when economists and bankers discuss the future of interest rates. The view is supported by banks and other deposit takers, which continue to reduce savers' rates. Shortly after Easter, National Savings & Investments (NS&I) joined the rate cutters. From June Income Bonds and the Direct ISA will then pay only 1%. In its announcement NS&I said "downwards movements in interest rates across the cash savings market mean that our rates have risen in the competitor tables."

If you need income, then the continued downward pressure on deposit rates is unwelcome news. However, if you are prepared to forgo capital security, there are plenty of investment options capable of providing a higher income return. For example:

  • UK equity income funds typically yield around 4% and offer potential for long term growth in income. The reforms to dividend taxation that took effect at the start of this tax year mean your first £5,000 of dividends now attracts no personal tax, regardless of your marginal tax rate.
  • Global equity income funds generally have a lower income yield than their UK counterparts, but offer a valuable element of diversification.
  • Property funds which invest directly in property (rather than shares in property companies) offer attractive yields. The current rental return on commercial property is around 5% according to Cluttons, the property agents.
  • Fixed interest funds, such as sterling corporate bond funds, have long been popular with investors seeking income. The range of income yields on offer is wide, with the highest income generally coming from funds investing in the lowest quality bonds.

If any of these investment opportunities interest you, do make sure you take advice before investing: simply picking the funds with the highest initial income can be a fatal mistake.

The value of your investment 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 value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.