News
Protecting income against low interest rates
22/01/2009
With interest rates at an historic low, act now to protect your income!
The Bank of England’s Monetary Policy Committee set a new precedent when it recently set the Bank’s base rate to 1.5%. This is the lowest it has ever been in its 314 year history.
The rate, which had previously been at 2 percent, has been cut sharply since October in an attempt by the Bank to kick start the economy by encouraging lending from high street mortgage and loan providers. However, recent evidence suggests that many lenders have delayed cutting borrowers rates and those who have cut rates may not have matched the latest 0.5% reduction. Experts say that interest rate reductions are increasingly ineffective as the major problem facing the British economy is a shortage of credit as banks have stopped lending.
Unfortunately for savers (who outnumber borrowers by seven to one) with Banks cutting rates, it has also thereby reduced their already decreasing income. Typically, individual savers have much less tucked away in their accounts than the average home buyer has borrowed, but collectively they have more than £1 trillion in savings, deposit, and cash ISA accounts.
The recent rate cuts have seen savers suffer an unprecedented 3.5% reduction in the return on their investments.
According to Moneyfacts about 40% of savings accounts are already paying a meagre rate of 1% or less - many are even worse paying just 0.1%! So for an account holding of £5,000 this would pay a mere £5 a year before tax. For pensioners who rely heavily on their savings to survive, free falling savings rates are a disaster. Banks want to make sure there is still some sort of incentive to save and are worried customers may stop saving if interest rates on their accounts fall further.
Savers need to act to protect their income and the purchasing power of their capital.
Everyone should have an emergency fund of instant access cash. Cash held on deposit up to £50,000 per institution is guaranteed, covered under the Financial Services Compensation Scheme (FSCS). For those savers who are willing to sacrifice guarantees on monies outside of their emergency fund, for the type of returns that will see their capital maintaining its purchasing power or providing an income, there are alternatives. The average FTSE 100 and All Share yields are currently 4.44% and 4.48% respectively. Of course, unlike deposits, capital is at risk with equity investments and whilst this may deter some, the fact that capital may increase in addition to the yield means that equities may potentially provide significantly better returns over the medium to long term.
With reference to borrowers, banks argue that it is difficult for them to reduce their borrowing rates as they are looking to rebuild their profits and reserves. To a degree this means keeping a wide margin between the official bank rate and the rates they charge the general public for their home loans.
To further encourage the country’s biggest mortgage lenders to pass on the latest reduction to borrowers the Government has just announced a second package of measures to encourage banks to lend to individuals and businesses.
The list of policies includes a scheme to offer insurance against banks losing more money from the bad debts which resulted in the credit crunch. Under the insurance scheme, banks will agree with the government the amount they expect to lose from particular debt. The Treasury will then sell insurance against about 90% of the institutions’ additional losses from the debt. In the meantime the Bank of England is able to buy up to £50 billion worth of assets in companies in all sectors of the economy. In the past, it has only bought such assets from banks or financial institutions.
Savers who are concerned about the level of interest they are currently receiving on their deposit accounts may wish make an appointment with a Skipton Financial Services (SFS) adviser to discuss their options.
SFS can review all of your existing investments to help maximise returns in these challenging times and discuss all the investment opportunities available to you from the entire marketplace. To arrange your personalised review, simply call us on 0800 137832 or click here for a call back.
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- Contact your SFS Financial Adviser
- Call a member of our Client
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