The Bank of England’s decision to cut interest rates by a further quarter of a percent, whilst possibly necessary in terms of the economy overall, may have come as a surprise to some. It has, after all, been more than seven years since the last cut and, until relatively recently, people thought the next movement would be upward. Certainly people hoping for a small improvement on the negligible amount of interest on their savings will have been disappointed.
While the cut itself is small, what it signifies is much bigger. Savers have endured the pain of dwindling interest rates on savings for years, and look set to be stuck with them for even longer, as rising inflation erodes the value of our cash. Sadly, the older you are, the worse it gets. The days when interest from cash savings could boost your retirement income are long gone. The enjoyment gained from monitoring your own portfolio of stocks and shares, purchased with 'spare' cash, and planning how to spend the income, is a distant memory. Hargreaves Lansdown estimates that since 2008, savers have theoretically lost £160bn worth of interest payments (based on actual rates compared to 2008 levels).
In addition, for those approaching retirement and looking to lock in a steady income from their newly liberated pension fund, the annuities market has never looked more depressing. Also, workers saving into their pensions and dreaming of retirement may have to dream a little longer. A recent report from global management consulting firm McKinsey warned that investment returns could also be “lower for longer” over the next 20 years, implying we’ll have to pay more in to get less back and suggesting savers must set aside on average an extra £1,000 a year to keep their pensions on track.
Is there anything to be done?
There are a few quick remedial steps that may be applicable in everyday finances. Firstly, anyone who has been overpaying a mortgage in the expectation that interest rates would go up should consider stopping! One option is to revert to the minimum payment and, instead of putting the cash recouped into a savings account, make a higher contribution into an individual or company pension instead. It’s important to make sure exactly how much can be put into a pension. The annual allowance is £40,000 but this could reduce if the total income is above £150,000. It's also worth checking if the employer offers different levels of contribution matching, and what the rules are about setting up and altering Additional Voluntary Contributions.
Secondly, if additional payments to a pension are not an option, from next April £20,000 a year tax free can be put into an ISA. Assuming the Lifetime ISA goes ahead, under-40s can also get a 25 per cent government bonus on £4,000 of their allowance. The vast majority of ISA accounts contain cash not shares, even though stock market returns have vastly outweighed interest rates in recent times. According to FT Money editor Claer Barrett, today’s rate move suggests a stocks and shares ISA is a better bet for medium-term savings.
Thirdly, although high interest accounts usually come with restrictions on withdrawals, it is possible to achieve some interest along with flexible withdrawals by making use of an interest-bearing current account that pays interest on credit balances, albeit subject to one or two limits. A quick check on a comparison site will reveal Santander is one of the better-known (paying monthly interest of 3% AER on a balance between £3k and £20k), and Nationwide has an account which, for now, pays 5% on balances up to £2,500 (subject to paying in £1000 per month), and has additional benefits available such as access to a regular savings product (maximum £500 a month) on the same rate. Other providers have offers tied to current accounts, such as travel insurance, which may in certain circumstances offer significant savings. Of course, these accounts may lose their promotional rates in due course, but with online applications, mobile banking apps and an array of comparison tools to track down the best deals, it is not difficult to stay ahead of this game.
For some people, small changes such as these will offer a small beam of light in an otherwise gloomy financial outlook.