Income-seekers beat frozen bank rates

By Ian Cowie Your Money 


Last updated: February 7th, 2012

Base rates are still frozen - despite rapid inflation

Nearly three years after base rates were frozen at a historic low of 0.5pc,despite inflation running about 10 times that level, savers and investors are waking up to this slow-motion bank robbery – and pouring money into share and bond-based funds to preserve its real value or purchasing power.

Equity income and corporate bond funds dominated the best-selling individual savings accounts (Isas) last month, according to Skandia Investments; one of the biggest Isa platform providers. Nor is Skandia talking its own book. Rival managers M&G and Invesco Perpetual took seven of the top 10 slots.

With the best easy access deposit accounts paying 2.5pc before tax, what’s not to like about shares yielding 3.3pc net of basic rate tax – to take the FTSE 100 index of Britain’s biggest blue chips as a benchmark – or corporate bonds yielding even more?

It ain’t rocket science. Other sources, including Capita – Britain’s biggest share registrars – have been reporting rising investment by individuals for months now. Shares not only offer a higher initial yield to income-seekers but also the prospect of capital gains in future, if the current recovery in stock markets continues.

True, there is no guarantee that you will get your money back from investments in shares or corporate bonds; the latter being IOUs issued by big companies. In both cases, stock market setbacks may mean you get back less than you invest. But unit and investment trusts provide a convenient and effective way to diminish the risk inherent in stock market investment by diversification.

While the Government adheres to its unspoken policy of running negative real interest rates to inflate away its debts, the only certainty bank and building society deposits offer to long term savers is the certainty of becoming poorer slowly. Yorkshire Building Society reckonsthe average savings account lost nearly £2,500 of its real value over the last decade.

Perhaps the big surprise is that it took so long for people to wake up to what is going on. Most bank and building society deposits’ apparent security is a sham over anything other than the short-term while they fail to match the rate at which inflation is eroding what these savings can buy.

http://blogs.telegraph.co.uk/finance/ianmcowie/100014666/income-seekers-beat-frozen-bank-rates/