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Earning an income from your savings is now as hard as it has been in the past 20 years as yields hit historic lows across almost all types of investment.
Investors suffering from falling returns are being forced into riskier investments to maintain their income and standard of living.
Data compiled for Telegraph Money by Quilter, the wealth manager, showed that in 1995 a yield of 7.5pc could be secured easily by owning low-risk bonds.
A decade later, a portfolio producing the same yield would have needed at least 40pc in riskier stocks and 10pc in alternative assets such as property and private equity. By 2015, 88pc of an investor’s wealth needed to be in stocks and alternatives, with only 12pc in low‑risk bonds.
The fall in yield has been keenly felt on cash holdings. During the past 20 years savers have enjoyed rates as high as 6pc from cash accounts, compared with less than 1pc today.
Bonds have followed a similar pattern. A 10-year “gilt” (British government bond) once yielded more than 5pc, but yields today hover around the 0.7pc mark.
Yields on corporate bonds, property and most major stock markets have seen similar falls, although the British stock market is one of the few to offer an attractive yield as Brexit uncertainty has weighed on share prices.
Retirees and income seekers have also been hit by dwindling returns from another previously popular option, the annuity. Here, rates are exceptionally low because payments are driven by interest rates, which have fallen, and life expectancy, which has risen. Even property, the darling asset of the past few decades, no longer guarantees a high income. A flood of money has driven up house prices, while buy-to-let tax changes have eaten into yields.
Central bankers bear much of the blame: their extreme monetary policy in the wake of the financial crisis has had a devastating effect on pensioners’ incomes. Quantitative easing – money printing – and ultra-low interest rates combined to push up the prices and force down the yields of the safest assets.
Meanwhile, buy-to-let rental yields are near historic lows, while selling second homes is likely to incur capital gains tax, wiping out a large proportion of profits.
Iain Barnes of Netwealth, a wealth manager, said low yields had caused people to act “more as investors than savers”. Darren Cooke of Red Circle Financial Planning said rising property prices meant the sums released when people downsized their home had shrunk, unless they moved from an expensive area to a cheaper one.
This was made worse by “selling costs, stamp duty, removal fees and the probable expense of refurbishment??, he added.
The decline of “final salary” pensions, which pay a guaranteed income, means that more retirees than ever must support themselves from investment income.
So what can they do to make an adequate return? Despite low yields, Dominic Thomas of Solomon’s, an advice firm, said there were now more options available for those approaching retirement, although he warned of added complexity.
Rising inflation poses a big risk to those on fixed incomes.
“Investors should pay attention to inflation and understand sustainable withdrawal rates and historic returns, while bearing in mind how long the portfolio needs to last,” Mr Thomas said. While investment trusts are popular among income investors, just three have raised dividends by more than inflation in each of the past 20 years.
Financial advisers recommend focusing on the total return of an asset, not simply the yield. High yields suggest the market does not think payouts are sustainable. Chasing dividends can come back to bite investors, they warn.
Looking ahead, Mr Barnes said savers should expect lower returns from their investments generally, following a decade of strong performance. He said he expected stocks in developed markets to return around 5pc a year instead of the long-term average of closer to 8pc.
Investors should therefore focus on paying lower fees, both on the funds they own and on the advice they receive. They should also not be afraid to sell some of their investments to raise income. Part of the reason yields are so low is that prices have risen dramatically, meaning that portfolio values are typically high at retirement.
Your Retirement Salary, a new book co-written by Richard Evans, The Telegraph’s Questor Editor, suggests selling investments gradually. It recommends that investors take income from dividends and supplement it, if necessary, by selling no more than 1pc of their pot each year.
The book says: “We suspect that the idea of gradually selling some of your investments causes disquiet among savers, who feel that, by eroding their capital even slightly, they are on a slippery slope that will end in them having nothing. In fact, selling assets slowly can make perfect sense.”
Your Retirement Salary, published by Harriman House, is available from Amazon for £10.99.
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