Newspaper article The Journal (Newcastle, England)

Where Should I Invest My Money? PEOPLE Are Finding It Increasingly Difficult to Live off Their Savings as Inflation Rises and Interest Rates Stay at a Record Low. IAN LOWES, Pictured, Gives People Advice on How to Make the Most of the Money Saved

Newspaper article The Journal (Newcastle, England)

Where Should I Invest My Money? PEOPLE Are Finding It Increasingly Difficult to Live off Their Savings as Inflation Rises and Interest Rates Stay at a Record Low. IAN LOWES, Pictured, Gives People Advice on How to Make the Most of the Money Saved

Article excerpt

IN MY last article for The Journal I highlighted the effect of inflation on everyday costs and on savings and investments. For people who rely on their savings for their everyday income, such as the many people in retirement, there is a double issue to deal with.

We are currently in an environment of inflation of 3.2% or 4.5%, depending on whether you use the Consumer Price Index (CPI) or the Retail Process Index (RPI).

The Bank of England's target for inflation is 2%. At the same time we have historically low interest rates, giving savers in deposit accounts interest at rates typically much lower than the rate of inflation.

Income paying investments in this low interest rate environment, therefore, are at a premium.

During the past two years many companies suspended or even ceased paying dividends, as they built up their cash balances, sought to pay down debt or simply could not afford to pay out.

A significant impact on UK dividend payments came from BP's Deepwater Horizon oil spill in the Gulf of Mexico.

Such was the financial impact of the spill on BP's finances that it ceased dividend payments for the first three quarters of 2010 and said its board would consider resumption of dividend payments in 2011 when it expected to have a clearer picture of the longer-term impact of the Deepwater Horizon incident and its fourth-quarter results would be known.

As BP was a major dividend provider in the UK, this has affected the income stream of pension funds and equity income funds, which rely on dividends to produce the value from which income may be derived.

Clearly, with bank and building society deposits accounts, fixed interest investments and equity income funds affected by the current environment, people seeking income need to be thinking differently. Equity income and fixed interest funds are likely to have been the default option for many in this position, but there may be a better way.

While many people want an income from their investments, what they actually need is a regular payment and that is not necessarily the same thing.

A growth-orientated portfolio can still produce the 'income' needed by way of automated regular or ad-hoc withdrawals. …

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