This article is part of Morningstar's Guide to Investing for Income
Seven years ago, in the days before Northern Rock collapsed, and most people had never heard of sub-prime mortgages, you could walk into most high street banks and in exchange for locking your money away for a couple of year you could earn up to 8% on cash.
With annual returns like that, many savers never needed to consider the stock market as a source of returns, choosing a blend of perceived safe haven assets such as cash and gilts to provide them with a steady stream of income.
Then the global recession hit, and the Bank of England took drastic action – slashing base rate to the record low level of just 0.5%. Since March 2009, many savers have been forced to endure negative real rates as interest payments fell short of the official inflation measure. In September 2011, the Retail Price Index climbed to a purse-pinching 5.6%, nearly three times the government target inflation rate of 2%. While inflation has since fallen, savers are still feeling the pinch.
Core inflation that excludes energy, food, alcoholic beverages and tobacco, picked up to 2% from 1.6% last month. It is inflation in this core basket of goods that is felt most keenly by young families and the elderly.
While cash rates have continued to steadily fall over the past five years, there has been significant improvement in the stock market. For those willing and able to take on a bit more risk, dividend paying UK stocks paid out an incredible £31 billion in the first quarter of this year, with predictions that dividend payments could reach £99 billion for the whole of 2014.
For savers unable to dabble in the markets, there may be some respite by the end of this year according to Bank of England governor Mark Carney. Last month Carney indicated that interest rates would rise at the end of this year, with economists predicting rises of 25 basis points every three months. By early 2017, base rate could be 2.5% - a level not seen for nearly a decade.
