Today, the Bank of England’s Monetary Policy Committee voted to keep interest rates at 0.75% for December 2019. With two of the policymakers pushing for rates to be cut to 0.5%, economists are speculating that interest rates will remain low in 2020.
But what does this mean for your money?
Savers Are Losing Out With Low-Interest Rates
The last decade has not been kind to savers. In fact, recent research conducted by Money Mail showed that the savers who have kept their saving in major banks have had their savings devalued by up to a fifth in real terms in the past 10 years.
Money Mail found that since the financial crash in 2008, the rising cost of living combined with low-interest rates has reduced the value of each £100,000 in a savings account to around £80,000.
The Financial Conduct Authority found 66% of savers have easy-access accounts with their current bank. As easy access savings accounts in big banks pay much less interest than other providers, this means that two-thirds of savers have been hit extra hard by the low-interest rates.
Interest rates lower than inflation
Over the past decade, the interest rates paid to easy-access account savers has fluctuated between 0.35% and 1.14%, however many of the big banks have paid much less than this in some cases as little as 0.05% or 0.1%.
At the same time, for seven out of the past ten years, the inflation rate (cost of living) has run above the 2% government target, even rising to 5.2% in October 2011.
Savers are losing out in real terms whenever the interest rate falls below the inflation rate (cost of living). For example, HSBC has paid 0.05% on its Flexible saver for the majority of the past decade, compare that to the rising cost of living, say at its highest at 5.2%, and your savings are losing their value at a rate of 5.15% which can have a huge impact on peoples finances. Just like our case study David Smith below.
One Saver Earned Just £91 interest from £100,000
David Smith, a retired university Lab officer, recently discovered the devastating effects of low-interest rates while looking after his sister’s finances.
In 2018, David’s sister held £106,060 in a Lloyds savings account after selling her home some years previously. In 2018, this savings account earned just £91.58 in interest one year – that equates to just 0.09% interest rate!
David, from Stockport, says: ‘I felt so angry when I found out what had happened. It just shows loyalty counts for nothing and that these banks are taking advantage of vulnerable people like my sister.’
Lloyds have commented on David’s situation stating, ‘Customers are made aware of what happens when their rate comes to an end, up-front and through a reminder, and it’s now easier than ever to switch to a better rate.’
But are the rates any better? Interest rates have not beaten inflation since 2016, leaving savers in the unfortunate position of getting fewer returns on their savings.
Savings compared to investments
When you compare the returns of investments over the past decade to that of savings, there is a brighter outlook for people who wanted to generate money from their capital.
“During the 10 years ended May of 2019, the FTSE 100 had a rank of 19 with a return of 63%. The top-ranked index during the period was the NASDAQ 100 Index, with a return of 405%. The worst performing index during the 10 year time period was the Straits Times Stock Index with a return of 35%.”
– Forecast Chart
If you are open to the idea of accepting a little risk for a much greater reward over a longer period of time, then it’s worthwhile thinking about investing your capital to achieve greater gains.
To balance the risks involved with investing, it’s advisable to apply the golden rule of diversification, spreading your money across different types of investments, e.g. shares, funds, regions and bonds.
It’s obvious that to capitalise on their money in the current climate, that savers must look for opportunities elsewhere to avoid being hindered by low-interest rates and to make the most of their hard-earned cash.
The views expressed in this article are those of Meredith Charles. They should not be considered as advice or recommendation to buy, sell or hold a particular investment. They reflect our personal opinion and should not be solely relied upon when making investment decisions.