The global economy may not be as sick as it was back in 2008, but recovery is slow. Seven years of Quantitative Easing (QE) and record low interest rates seem to be the only cure. But there are some nasty side effects for savers.
Saturday 5th March marked the seventh anniversary of the day the Bank of England cut interest rates to their current historic low of 0.5%. It’s stayed there ever since, and turned all the old wisdom about savings upside down.
Estimates vary, but many commentators agree this particular treatment has cost savers an estimated £160bn. Investors in property may be doing very well with cheap borrowing, but returns on cash have been virtually annihilated.
In November 2007, before the Bank started to cut interest rates, the average return on a one year fixed rate savings account was 5.99%. As the base rate fell, and the government’s Funding for Lending scheme came into effect, returns on saving plummeted.
According to Hargreaves Lansdown, savers may have lost out on a total of £160bn since 2009 – the equivalent of £6,000 for every household. Up to £106bn is being held in accounts paying no interest.
The story for Cash ISAs is little better. Rates have fallen in line with savings accounts. While their tax-free status made them more attractive than conventional savings accounts when rates were high, it has much less impact when rates are low. With the coming of the Personal Saving Allowance, which allows basic rate tax payers to earn up to £1000 in interest on any savings tax free, the tax-free advantages of an ISA are worth even less. Savers would need around £50,000 before they earned enough interest to make an ISA worthwhile.
Many commentators argue that as a result the Cash ISA is dead in the water.
The effect of inflation
The picture for savers is actually worse than it appears. Interest rates are so low they do not keep pace with inflation. This means that savings in cash actually fall in value in real terms; the more you save, and the longer you save it, the more real worth you lose.
Predicting the future is never an exact science. Interest rates will have to go up eventually, but only the most foolhardy would suggest when it might happen. Banks have cash in their vaults thanks to the Funding for Lending programme, and no need to attract savers with good returns.
The future for savers remains bleak.
If cash is no longer king, what are the alternatives? On the face of it, the low rate of the past few years have been good news for those with a property portfolio. The average mortgage rate has fallen by more than 3% over that period, saving borrowers £270 a month on a £200,000 repayment. Rates on some deals have halved.
Access to this cheap credit has created a boom in the housing market. Today, rates are low, lenders are becoming keener to lend again – but there could be trouble along the line. If borrowers get too comfortable taking on high levels of debt at low interest rates, they could be in for a nasty shock if and when rates rise.
But what about stock and shares? Despite recent jitters in the stock market, investors in UK shares over the last seven years have seen a return of 87%, or 138% if they reinvested the dividends.
QE has helped supply liquidity and confidence to markets, while low interest rates have helped companies access debt markets cheaply. At a time of miserable savings rates, firms paying dividends look appealing to investors.
Should you forsake cash for the promise of better returns with investment? If you're unsure how to save your cash, or would like help with lower risk investments, contact our investment team today.
Past performance may not be indicative of future results. The value of investments can fall as well as rise and you may not get back what you invested.
Financial Conduct Authority does not regulate taxation and trust advice. Levels and bases of reliefs from taxation are subject to change.
Remember your home may be at risk if you do not keep up with the repayments for a loan or mortgage secured on your property.