Options for income

The Bank of England cut interest rates by half to 0.5% pa today, and embarked on a programme of quantitative easing ("printing money" by writing cheques on itself to buy corporate bonds). The cut will probably make little difference, although it is arguable that as interest rate bills come down lower borrowing costs will be a disincentive to households to reduce debt. The outlook, though, is for a rise in interest rates next year, so any opportunity to strengthen household balance sheets should be taken

This cut is so small it is unlikely to stimulate the spending spree that the monetary authorities are trying to encourage to kick start the UK economy.

The real losers will be savers who are now losing money (in real terms) every day they leave it on deposit. The worrying thing is that many of these savers depend on their interest as a valuable source of income, and, as such may be forced into other forms of investments which carry significantly higher levels of risk. Recent statistics by the IMA recently showed that 84% of net retail investment inflows went into Corporate Bond funds.

Alan Dick CFP, a fellow Financial Planner and director of consumer affairs at the IFP said "Investors are being encouraged to view corporate bonds as a replacement for cash, whereas they are much closer to equities in terms of risk in the current market environment. Could this be the next mis-selling scandal to further destroy consumer confidence in the financial services sector?”

The potential is certainly there, but bonds will always have a place in a well thought out, asset allocation based investment strategy. Both bonds and equities can provide an alternative source of income to savings interest, provided it is on a long term basis and sufficient liquidity is retained to cover short term cash calls.