I received a letter recently from my bank. The title was ‘’The interest rates on your savings are going down’’. The rate on my savings account is falling from 0.1% to 0.01% (before tax). The rate on my current account is already at 0%, and I pay a small fee for a ‘premier’ service. All in, I am now paying the bank to hold my money.
I am sure similar letters are on the way to many savers following the Bank of England’s emergency cut in interest rates to the record low of 0.1%. There are still a few rates available over 1% for savings if you shop around, but even a very organised saver will be losing money in real terms every year due to inflation. This has been the trend for over ten years now and will compound up over time, eventually taking a sizeable chunk out of the real value of any cash on deposit.
We have seen another significant blow to savers today with the announcement of a very steep fall in rates offered on NS&I products from November this year. In particular, the flagship rate on their Income Bond is falling from 1.16% to 0.01%.
This gap between inflation and savings rates is arguably low at the moment but looks set to continue for the long term if and when economic conditions reach a new normal. The Bank of England is reportedly running scenarios based on a negative base rate. National governments around the world have borrowed huge amounts to support their economies, and we are likely to see a related increase in corporate and personal debt as companies and individuals attempt to get by. Few people will be advocating a rise in interest rates to help prudent savers because debtors of all stripes will then not be able to keep up their payments.
Long term savers, typically people in or approaching retirement and those who are just naturally cautious need to give this some serious thought. They will either need a much bigger cash pile to meet their needs or will be forced to seek a better potential return by investing some of their money in real assets, i.e., stocks, bonds and property. Markets are likely to be volatile for some time, and this will create valid concerns for investors, but ultimately, those who do not invest cash will be guaranteed to lose increasing amounts of money.
Investing at any time and especially in the current climate is best done with help and support. This will lead to the right approach to risk, tax planning and above all, lend confidence to the investor throughout the initial process and thereafter.
The value of investments may go down as well as up.