Creating wealth during
an economic downturn

Savers experience the lowest savings rates in more than 100 years

The Bank of England’s monetary policy committee cut its key rate by half a percentage point to 0.5 per cent on 5 March 2009 and unveiled a programme under which it will buy up to £150bn in government gilts and corporate bonds. It is also going to pump £75 billion of newly created money into the economy over three months in a process known as ‘quantitative easing,’ in an effort to secure an economic recovery.
Savers are now experiencing the lowest savings rates in more than 100 years, with some accounts actually paying zero interest. Faced with this scenario, we have provided some alternative solutions that may fare better during this current economic downturn.
To start with, much will depend on the amount of risk for return you are prepared to take, how much accessibility you need to your money and the amount of time over which you want to save or invest. It is important that any savings or investment vehicle matches your feelings and preferences in relation to investment risk and return. The higher up the spectrum of risk, the greater the opportunity for significant capital growth and, conversely, the greater potential for loss.
Depending on your own situation and if appropriate, a mix of assets with varying degrees of risk is probably the best solution. If you are a taxpayer, it may be prudent to utilise your 2008/09 tax-efficient cash Individual Savings Account (ISA) allowance of £3,600. For couples, this can add up to a further £7,200 of tax-efficient savings this financial tax year.
Cash ISA savers can also invest into equity ISAs, with the current combined annual tax-efficient allowance totalling £7,200, of which a maximum of £3,600 can be held in cash. So a couple could have a combined tax-efficient savings amount of £14,400 sheltered from tax. Children aged 16 and over are also eligible to save in a cash ISA.
Non-taxpayers, including children, do not have to pay tax on any savings income up to their annual personal allowance of £6,035 in the current tax year. Non-taxpayers should complete HM Revenue & Customs R85 form, available from banks and building societies, to ensure interest is paid gross.
As returns from ordinary deposit savings products have been cut to very low levels, many savers are looking towards lower-risk bond funds offered by investment companies as an alternative home for their money. Bonds, more usually referred to as gilts, are issued by the government when it needs to borrow money. Although the yields of gilts have been dropping as inflation and interest rates fall and investors look for the safety of government-backed stock, on the upside index-linked gilts provide investors with the potential to hedge against inflation.
With savings rates at such historic low levels, and Britain in the grip of the credit crunch, it may also be appropriate for some investors to consider looking to generate income by diversification outside the UK. Looking overseas may also yield investors better returns, particularly to areas benefiting from the strength of the euro, such as Greek and Irish stocks, although it’s important to remember that the guarantee is with the respective governments.
If you are looking for income, some European equity funds have been benefiting from the rising euro and this strength may increase even further if the British government is forced to print money, which could be a distinct possibility this year. If this does happen investors will need to be comfortable with the risk associated with an increase in sterling.
Global gilt funds may also be worth considering, those which invest in bonds issued by governments, public authorities and international organisations in any area outside the UK. Corporate bonds are an IOU issued by a company and they pay a fixed amount of interest for a set term and return your capital at maturity. Please note that changes in exchange rates will affect the value of investments that are not in sterling.
Despite the economic gloom, some analysts also believe America could be the first to emerge from the current turmoil. President Barack Obama’s huge bailout package many believe will give the US economy a much needed boost.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not a guide to future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.