Interest rates have been kept at a historic low of 0.5% for more than seven years now, and there’s no sign of this changing any time soon. And even though this base rate has been fixed since 2009, banks are continuing to reduce savings account interest rates.
Data compiled by Moneyfacts within their UK Savings Trends report, found that there were 883 rate cuts between November 2015 and June 2016 alone. Furthermore, 34% of the 86 providers to offer fixed rate bonds made reductions during May 2016, as did the 48 providers of fixed cash ISAs.
Bleak Times for Savings Accounts
Gone are the heady pre-financial crisis days when the average one-year fixed rate bond was 6.15% (in October 2007). A £50,000 pot would return over £3,000 in those days… but by March 2009, the gross return had fallen to just £1,350 on the same amount.
In March this year, things looked even bleaker. The average one-year fixed bond was 1.05% – taking that gross annual interest on £50,000 right down to £525.
And, in a final kick to the stomach for savers, even National Savings & Investments, previously known for their market-leading rates which drew in floods of eager applicants, dropped interest rates for more than a million customers’ savings accounts.
There’s even speculation afoot that further cuts to interest rates are being considered by the Bank of England. This could push them into the negative… resulting in banks and building societies actually charging savers to keep their money.
With such grey times for savers, it’s time to heed some warnings: relying on savings accounts may not just be unprofitable – it may actually damage your future.
One in four UK workers are already saying that low interest rates mean they expect to now have to work past the age of 65, according to Canada Life Group Insurance research. If you need your capital to grow by a certain amount, low interest rates could seriously damage its ability to do so.
It’s vital that the interest you’re earning on those savings keeps pace with inflation over the years: if it doesn’t, your savings will lose buying power.
Mark Carney, governor of the Bank of England, has warned that those 5% base rates are the stuff of history. Even when rates do start to rise once more, he reckons they will stick at around 2.5%. So what does this mean? Are savings accounts dead in the water?
Well, no. Not exactly. Savings accounts are still the best place to store money in case of emergencies, or what’s needed at short notice. They’re great if you can’t, or aren’t prepared to, put your capital at risk. There’s also the benefit of guarantees: the FSCS (Financial Services Compensation Scheme) will protect up to £75,000 of your money per financial institution in case of it going out of business. Then there’s the guaranteed level of interest for a specific term offered by many savings products… albeit a decidedly low rate.
The problem is just that they’re not really any good to rely on to meet your long term savings goals anymore.
So what can you do?
If you’re prepared to take a long term view of your financial future, you can make alternative choices. A financial advisor might be a good idea, and provide you with expert recommendations for putting your savings to work for you. Or you may choose to investigate some of the secured peer to peer lending options now available that cut out the banks and enable you to lend directly to property owners with the loan secured against the borrower’s property. There are risks involved and you may lose some or all your capital, but there is usually a cushion of at least 25% of the property’s value (i.e. the loan is for up to 75% of the property’s value) in place to protect lenders in the event that the property has to be sold for lenders to recover their capital.
So investment is perhaps one of the better options now, particularly if you do not need instant access to your money. Nonetheless, there is risk associated with investment: your capital could go down in value, and there aren’t those guarantees that you’d get by sticking with a savings account. But if you can weather that risk, the potentially higher returns could make a real difference to your chances of meeting your long term financial goals.