Dig deep to uncover the best savings vehicles

We are living through exceptional times with derisory rates of interest from most quarters.

Savings accounts are not even keeping pace with inflation. This means the money lent is actually devalued in real terms.

National Savings & Investments, whilst trustworthy, are probably the worst example, paying only 0.20 per cent on their so called 'investment' account and 0.30 per cent on easy access savings. Slightly higher rates apply for large chunks of money.

A top no notice account pays 2.76 per cent AER and this is from Scarborough, which had to be rescued by the Skipton Building Society.

Yet inflation has now reached 3.5 per cent.

Introductory bonuses can boost the rate – such as 3.15 per cent at Coventry for instant access – but make a note to transfer when the incentive comes to an end.

If prepared to leave funds tied up for several years, slightly better fixed rates can be secured: 5.10 per cent for five years (AA), 5 per cent over four years (Birmingham Midshires) and 4.70 per cent for three years (from the Indian bank, ICICI).

The risk here is that inflation may greatly exceed such rates.

If taking the tax shelter of a cash ISA, the rates are worse: 2.58 per cent instant (Barclays), 4.25 per cent for four years fixed (Halifax) and 4.60 per cent for five years fixed (Leeds).

One idea is to save on a monthly basis to secure a better rate and perhaps use funds from income. Stroud & Swindon pay 4.50 per cent on 10-250 monthly but cut to 2.50 per cent if a payment is missed or more than one withdrawal a year is made.

Investment trusts provide one answer for those seeking income and have the advantage over unit trusts that they carry reserves which can help to maintain income payments in lean years. However, choose both the trust and sector with care.

Look particularly at the leaders in four investment trust sectors with one year dividend yields shown, calculated by AIC using Morningstar:

n financial, like Asset Management 10.9 per cent and Blue Planet Financials Growth & Income 9.3 per cent;

n property, like Invista Foundation Property 8.8 per cent and IRP Property Investments 8.5 per cent;

n smaller companies, like Small Companies Dividend 7.5 per cent, ING UK Real Estate Income 7.4 per cent and Shires Smaller Companies 7.4 per cent;

n UK growth and income, like Shires Income 8.8 per cent and British & American 7.3 per cent.

Mention should also be made of City Merchants High Yield UK High Income, which is an investment trust which selects bonds and equities and returned 7.6 per cent dividend last year.

Individual non-investment trust shares can also be purchased for their income. Only three quoted UK firms have consecutively raised their dividends in each of the last 25 years: Hamla (safety equipment), PZ Cussons (Imperial Leather soap makers) and Tesco.

There are many others with good yields. According to Hemscott research last month, 14 out of the FTSE350 offer prospective yields of at least eight per cent. Stars to consider include builders like Barratt Developments (12.1 per cent) and Taylor Wimpey (10.1 per cent) as well as Premier Foods (10.4 per cent), Electrocomponents (10.1 per cent) and Tomkins (9.9 per cent).

Yet dividends from UK listed companies fell by 10bn, or 15 per cent, last year to 56.9bn.

Insurers are some of the most inconsistent.

Legal & General cut its interim dividend by 45 per cent last year and Aviva by 31 per cent, perhaps in part to pay for their advertising campaign of name change from Norwich Union.

Ignis Asset Management think the coming dividend season may see strong examples as many companies roll over payments which were held back last year.

Equity income funds – which invest in shares with above-average dividend yields – form one solution.

The advantages of such a collective are twofold: sharing the risk between many companies so you are not disadvantaged unduly if one firm cuts its dividend and, secondly, benefiting from a professional stock picker.

Leading stockbrokers, like Martin Payne of Leeds-based Brewin Dolphin, use such vehicles for clients. He tips Artemis Income, managed by Adrian Frost, Jupiter Income run by Anthony Nutt, and two managed by Neil Woodford: Invesco Perpetual Income and Higher Income.

Payne avoids Martin Currie UK Equity Income: "It is still suffering from losing its way in 2008 from being overweight in the financial sector, dragging its performance, and being underweight in commodities."

Investors worried over too much of their portfolio in the UK could opt for a fund like Newton Global Higher Income which is mainly in continental Europe, North America and Asia Pacific excluding Japan. James Harries has managed this 900m fund for four years and favours the financial, telecoms and healthcare sectors.

Worldwide, look also at Newton Asian Income and, despite the euro fluctuations, Ignis Argonaut European Income which is invested in around 60 of Europe's largest companies like France Telecom and Santander.

Corporate bond funds form a further collective vehicle to secure good dividends.

Such bonds are company debts which are traded on the stock market instead of a firm borrowing from a bank. Until this month, when bonds could be bought in 1,000 units, a single bond was often too large for an individual to buy but ideal for a manager.

Manchester United FC, for instance, issued bonds of 50,000 recently which run for seven years and should pay 8.5 per cent.

The trick for such a manager is to select bonds which will pay good interest but not be at risk from defaulting. The riskier the firm, the higher the rate they will have to pay to issue their bond.

Depending on your attitude to risk, check on the overall rating given to a corporate bond fund before investing. If, for instance, the underlying bonds are triple A or five star rated, they will be very secure but the interest will be low. Conversely, so-called 'junk' bonds could create a volatile fund but with a potentially high return.

High yield corporate bond funds averaged gains of 47 per cent last year whilst those investing mainly in top grade firms returned 15 per cent.

There is also a mid risk group – often termed 'strategic bond' funds – which achieved 22 per cent growth.

Two reliable corporate bond funds, both offering 6.8 per cent yields, are Old Mutual and Henderson Preference & Bond, rated respectively two and four star by Morningstar research.

By comparison, Standard Life AAA Income Bond returns only 2.3 per cent.