With interest rates just raised from 0.25 per cent to 0.5 per cent, and banks reluctant to pass on the benefits to savers although applying the increase to mortgages, the thrifty are having to look elsewhere for returns, especially those needing an income.
But where best to invest?
Which brings us back to the age-old argument of property v shares and the consequent need for financial advice to aid returns, diversity and portfolio construction.
Residential property is something tangible and real. It has generated consistent wealth and long term appreciation for millions of people.
House prices have risen from an average of £9,767 in 1973 to £210,116 last month, according to figures from Nationwide.
And, despite the Government’s house building push, that upward trend is likely to continue given that demand outstrips supply and the availability of suitable land on this crowded island is finite.
Demand for rented accommodation also looks set to remain high, driven by low levels of house building and low wage growth, which makes it hard for lower-income families and first-time buyers to afford their own home.
It is estimated that almost one in four households will be renting from a private landlord by the end of 2021.
Investors have two main routes.
Some opt for “home flipping” – searching for run-down properties, refurbishing them and selling them for a profit.
Others look for properties that can be rented to generate a consistent income.
Buy-to-let had been booming but more recently the Government has set its face against the sector, accusing it of making it harder for people to get on the housing ladder.
Consequently, buy-to-let costs have risen and in many cases returns have therefore been eroded.
Purchasers of second properties now pay rates of stamp duty three percentage points higher than those for ordinary buyers. Tax relief changes between now and April 2020 could significantly increase the amount of tax payable by higher and additional rate taxpayers. And, if you subsequently sell the property, capital gains tax comes into play – 28 per cent for higher and additional rate taxpayers and 18 per cent for basic rate taxpayers.
And there is a lot of hassle involved.
You need to identify suitable properties, fund the purchase price plus legal and survey fees, then identify a tenant which will probably mean paying an agent to vet candidates to ensure they pay on time and respect the property.
And, while yields can be good, typically around the 4-5 per cent mark, the property market is also highly illiquid – probably not for those who may need to access their money fast.
So what about shares?
Stocks are very liquid, quick and easy to sell. Over the long term they can usually be expected to outperform most other asset classes.
But they rise and fall depending on economic sentiment and company performance. It can therefore be something of a roller-coaster ride.
Important then to ensure diversification through a mix of investments – geographically, by company size and by sector.
A further mix of both active funds run by professional fund managers and passive funds such as index trackers is another approach.
An alternative is Real Estate Investment Trusts (REITs) or buying individual shares in house builders, providing exposure to property while allowing for diversity. Owning a REIT combines some of the benefits of stocks with some of the benefits of real estate.
Equity income funds is yet another possibility, but there are many.
Tax efficiency through wrappers such as Isas and pensions is also key.
Always be aware that your investment, whatever it is in, can go down as well as up.