Still, as the saying concludes, that ill wind must bring some benefit. So investors may feel that, for every £ of dividend income they lose, there is a government ready to offer some compensation because of its desperation to grab savings capital. A public-sector borrowing requirement (PSBR) for 2020-21 running at perhaps seven times the amount expected before the start of the year – £370bn compared with £50bn – will see to that.
Most heartening is that the Treasury now looks to the state-owned savings bank, National Savings & Investments (NS&I), to raise six times the amount of net new borrowing it was tasked to bring in before the lockdown. The new figure is £35bn, or 70 per cent of the entire PSBR pre-Covid-19, and works out at approaching £1,600 for every one of the 22m or so UK adults older than 50.
People above that threshold may be a decent proxy for those with the financial resources to help out. Yet it is a sad fact that many such people have less than £1,600 savings in total anyway. In other words, NS&I is likely to have its work cut out to raise its target and will need to offer interesting deals to those with the resources to help, those affluent folk for whom savings are the low-risk part of a diversified portfolio.
To this end, the NS&I has already axed a proposed cut in the effective interest rate on premium bonds. A prize fund, whose value was to be trimmed in May, has been maintained at 1.4 per cent. This gives me the chance to reiterate the view that the £50,000 maximum holding for bonds is a must for anyone with the resources.
The effect of having the maximum is that, on average, a saver can expect two prizes a month. This brings a return of 1.2 per cent a year net, but 2.0 per cent gross equivalent for a 40 per cent income-tax payer since prizes are tax-free. That comes with the upside offered by prizes bigger than the £25 minimum, although it is balanced by the absence of guaranteed prizes; random distribution means that even maximum holders can draw a blank for months running. Even so, if NS&I were to raise the level of its maximum holding – it has been £50,000 since 2015 – that would be too good to reject.
Maybe more enticing is the hope that the NS&I might reintroduce a version of ‘granny bonds’ – inflation-linked savings certificates. These were closed to new savers some years ago and their nearest equivalent since then has been the 65+ Guaranteed Income Bonds that NS&I offered during the first half of 2015. These were generous but not index-linked, a crucial difference. Inflation-linked NS&I bonds were – and remain for those who continue to renew them – a great product. True, their index-linking is now tied to the consumer price index (CPI), which always lags the retail price index to which the bonds were originally tagged.
Even so, the near-relentless chug of inflation means that over the long haul the performance of index-linked bonds is not far behind equities. Sure, they lag when equities are in a bull phase, but their recovery when equities go into sustained bearish periods – such as 2000-03 or 2007-08 – means that, on average, ‘inflation-linkers’ get close to equities yet without the volatility. Sure, the inflation-plus component of interest is now derisory – just 0.01 per cent in the latest iteration of granny bonds – but CPI-linking alone makes them an attractive risk-free product even for serious investors and especially while interest rates are close to zero.
Not that equities are done as providers of index-linked income. Obviously 2020 will be miserable. In the first half, income received – and distributed – by the Bearbull Income Fund was 34 per cent lower than 2019’s first half. That was a good result compared with the average for London’s quoted companies, where, according to Link Group, the cumulative payout was 41 per cent below 2019’s. In the second half, the Bearbull fund’s distribution is likely to fade to average. In which case, the full-year payout will be about 40 per cent lower than 2019’s, about in line with Link Group’s best-case scenario.
However, even on that much-reduced payout, the yield on the income fund’s likely 2020 distribution will be 4.3 per cent. That’s a substantial amount. True, it is partly a function of the falling value of the income fund, but it contains the implication that the fund’s yield might be too high. It is likely to be about 1.2 times the 3.6 yield projected for the London market by Link Group. In the past, a 1.2-times yield ratio was a specific target for the Bearbull fund. In today’s straightened times that might be a stretch, implying an absence of quality in the fund. Besides, in the coming years, ability to pay will be more important than ever and a3.6 per cent yield should be more than enough. Granted, that depends on what happens to inflation, but it may be time for some changes to the income fund.