Anything of interest?

In January 2008, the Bank of England base rate was 5.5%.  By 8 January 2009, it was just 1.4%, the lowest level since the Bank was created in 1694. 1 It is quite possible that the rate will fall further - the US already has virtually 0% rates.

If your deposit interest rate matches the base rate - and many variable rate accounts pay less - your monthly interest income for February 2009 will be little more than a quarter of January 2008's sum.  This rapid change underlines a fact that has been forgotten in recent years: a variable rate deposit is a secure home for 'rainy day' money rather than a reliable source of long-term income.

If your priority is income rather than capital security and instant access, the fall in short-term interest rates does not have to lead to a  corresponding drop in your income.  There are several ways to obtain income yields well above the 1.5% gross of base rate, including:

Guaranteed income bonds A handful of specialist life companies offer these bonds, which guarantee income for a fixed period, typically up to five years.  You can choose between monthly and annual income payments, which are deemed to be net of basic rate tax.  While income and the maturity value are guaranteed, if you need access to your capital before maturity, you are likely to receive back less than your original investment.  

If you are a higher rate taxpayer, then at current yields you will have no income tax liability until your bond matures.  Even then, the additional tax will be based on the net income you have received, rather than the equivalent gross amount (as would apply to deposit interest).

Corporate bond funds While short-term interest rates have been falling, the opposite has been happening to the yields available from most fixed interest securities, other than government bonds.  For example, the averate rise in corporate bond yields over the 12 months to mid-December 2008 was slightly more than 2%. 2 The increase reflexts a variety of credit-crunch related factors, but is seen by some commentators as creating an attractive investment opportunity.

Corporate bond funds can be held within an ISA, in which case there is no income tax deducted from the interest income.

UK equity income funds The fall in share values has had the opposite effect on dividend yield on UK shares as measured by the FTSE All-Share Index was 4.66%. 3 This figure is effectively net of basic rate tax.  Some UK equity funds are quoting yields of more than this, but at present all quoted yields need to be treated with caution.  Yields are normally calculated on a historic basis, ie based on the last year's payments.  There will be dividend cuts in 2009, and not just from the banks.

Past performance is not reliable indicator of future performance.  The value of investments and income from then can go down as well as up, and you may not get back the original amount invested.

1. Bank of England, 8/1/09
2. Markit iBoxx, 12/12/08
3. markets.ft.com, 12/12/08