Martin Lewis offers advice on savings and interest rates
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Hedge fund manager Crispin Odey said the Bank of England cannot afford to put up interest rates because this will drive up Government borrowing costs, according to the Daily Telegraph. That spells further disaster for savers with inflation set to soar.
Savers who leave their money in cash now struggle to get more than 0.5 percent a year, yet the Bank of England is warning inflation could top four percent this year.
This means the value of their hard-earned cash will fall real terms, and that will continue in 2022 and 2023.
This is particularly bad news for pensioners who rely on generating interest from their savings to boost their retirement income.
However, those who are happy to take a higher level of risk can generate up to five percent from a number of top investment funds.
Savings rates are near zero but there are alternatives. (Image: Getty)
Darius McDermott, managing director of FundCalibre.co.uk, said this will help protect the value of your money as prices rise but there is a catch. “To get that kind of yield you have to invest in stocks and shares or bonds, which means your capital is at risk.”
Savers should only put money into the stock market if they are willing to leave it there for at least five years, preferably longer.
This gives them time to overcome a short-term market correction, and benefit from long-term equity price growth.
Although stocks and shares are more volatile in the long short term, history shows they produce a superior return to cash over the longer run.
READ MORE: Top ways to save £100 a week
Don’t be pinned down as inflation rises (Image: Getty)
McDermott named five investment funds that yield far more than you will get from a deposit account.
Schroder Income Maximiser invests in undervalued UK companies and currently yields 6.85 percent a year. “You may have to sacrifice some capital growth in return for such a high level of income,” he said.
If you want capital growth as well, McDermott suggests JOHCM UK Equity Income. This is one of the highest yielding UK equity income funds with a yield of 5.4 percent. “It invests in unloved UK companies of all sizes in the hope that their share prices will rise sharply when they come back into favour, boosting your total returns.”
The City of London Investment Trust also offers a high yield of 4.9 percent and is highly popular among equity income seekers. “It has the UK’s best track record for raising dividend payments, now 54 consecutive years and counting,” McDermott said.
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Shares are riskier but make your money work harder. (Image: Getty)
Investors can also generate attractive levels income from funds that invest in a global spread of stocks and shares, diversifying their wealth.
McDermott recommends Murray International. “This is a global investment trust that can also invest in some bonds to boost its income. Current yield is 4.6 percent.”
His final tip is VT Momentum Diversified Income. This also invests in a spread of global companies and bonds. It has a yield of 4.85 percent.
These funds can be bought inside your annual £20,000 Stocks and Shares Isa, which means you can take all your returns free of income tax and capital gains tax.