The search for income
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The rates available for cash held on deposit have dropped sharply since the Bank of England introduced its latest round of rate cuts last October.
The best rate available now is just over 5 per cent, compared with over 8 per cent available last year and most accounts are yielding much less.
Moneysupermarket.com head of savings and current accounts Kevin Mountford says: "Gone are the days where accounts paying 6 or 7 per cent were plentiful. With the average rate at just 1.43 per cent, vigilance is key and variable rates can drop like a stone.
"There are still some good deals to be had though, especially if you are prepared to lock your money away and fix the rate. Anglo Irish and ICICI are offering 4.6 per cent or more on fixed-rate bonds, and Nationwide has a fixed cash Isa at 4 per cent.
"For those who usually have spare cash at the end of the month, a regular saver account can be a great idea. Barclays and Norwich & Peterborough both offer 6 per cent on user-friendly accounts."
But away from cash what other opportunities are available for investors looking for income?
According to the latest figures from Fidelity FundsNetwork, income is certainly at the top of investors' priorities at the moment. The top 10 funds sold through FundsNetwork in December were dominated by bond funds and income funds.
FundsNetwork head David Dalton-Brown says: "With little or no change from November, December similarly saw investors favouring bonds and searching for income."
Informed Choice managing director Nick Bamford agrees that cash deposits have lost the attraction they had last year for those investors looking for income.
He says: "It used to be all about deposits 12 months ago. Now that has gone. One of the drivers for that has been the very low rates of interest. It is time to move into an invested portfolio of corporate bonds and equity income funds.
"The prices of shares have fallen so much that the equity income yield is attractive but there is some risk. Corporate bonds have good yields. Gilts are not looking quite so attractive as 12 months ago."
Chelsea Financial Services Darius McDermott also says fixed income is the best place to be for investors looking purely for income but he warns that a lack of liquidity is still an issue for corporate bonds.
He says: "The high-yield bond sector is throwing out well in excess of 10 per cent. If they do not avoid defaults, then at least they are returning. I would not go for them if you are looking for total return today but for income, maybe yes.
"Corporate bonds are fairly attractive, but they are illiquid for the fund managers themselves. I would put them on a watching brief in the short term, say, for three months but there are some handsome values to be had over the long term."
For more adventurous investors, McDermott says: "Equity income for those prepared to take equity risk is a good place to be at the moment. Markets have got a very high yield. The FTSE 100 is yielding just over 5 per cent. Equity income funds from Ignis and Artemis are yielding about 6 per cent.
"The Schroders income maximiser is our favourite. It has a target yield of 7 per cent and last year it paid out 8.6 per cent."
Another sector that has traditionally produced good levels of income is property but both Bamford and McDermott are less enthusiastic about the short-term prospects there.
Bamford says the correction in the commercial property market means assets are at a low price at the moment but he warns that there is still a risk as income is reliant on rents continuing to be paid.
He says: "With commercial property, you are buying the asset at a low price as long as rents are still coming in. Again, this is not without risk. There has been a huge correction in the property market."
McDermott is even less enthusiastic, saying: "Would I be buying commercial property now? No. Property tends to be highly linked to the UK economy. Clearly, retail is struggling. I would give it a year. But if you have assets already in that area then you would not sell out now."
It seems that the credit crunch has put an end to the low-risk high returns that were available from cash deposits only a year ago. Instead, investors will have to decide on the trade-off between risk and return in the search for an alternative source of income.
