Savers have lost a staggering £130 billion from low interest rates in the last six years according to research from Hargreaves Lansdown equivalent to £5000 per household. The firm also says that the amount of money held in zero-interest has trebled.
Laith Khalaf, senior analyst at Hargreaves Lansdown says: “Cash savers have endured six years of hurt, suffering heavy blows from falling interest rates, quantitative easing and funding for lending. They are still feeling the effects of the global financial crisis, almost a decade after it started.”
The amount of money held by households in non-interest bearing accounts now stands at £149 billion, compared with £47 billion in September 2008 (see chart below).
While this amount has trebled, by comparison the amount held in interest-bearing instant access accounts has grown by just 15%. The firm says that the average rate paid on an instant access account has also fallen from 3.1% in September 2008 to 0.78% now.
This £130bn figure estimate is based on Hargreaves Lansdown analysis of Bank of England Statistics, following on from the central bank’s own methodology used in 2012 to assess the impact of lower interest rates on savers. The analysis compares the actual interest paid on deposits from September 2008 to January 2015 with what those payments would have been, had interest rates remained at their September 2008 level. The analysis assumes the stock of deposits were as occurred, in reality if interest rates had been higher the stock of deposits would almost certainly have been higher too.
The firm says that while cash rates have suffered, most other asset classes have prospered since March 2009, when interest rates hit 0.5% for the first time, and QE was introduced. The average UK house price is up 27%, the FTSE All Share has returned 139% with dividends re-invested, and the UK gilt market has returned 42% (total return 30th Feb 2009 to 28th Feb 2015).
Khalaf says that the market is anticipating an interest rate rise early next year, though he suggests the rate rise pencilled is just 0.25%. “That’s a pretty small amount of soothing balm for the six years of pain cash savers have endured”.
HL has set out the following five
options for those worried about low rates
1. Grin and bear it. Or at least bear it. Everyone needs a cash buffer to meet immediate spending needs, at least 3-6 months of expenditure, so there is no way of totally avoiding low deposit rates. It makes sense to shop around for the best deal.
2. Put your savings in an ISA. The tax protection afforded to you might seem pointless right now given such low interest payments, but in 4 or 5 years’ time you might be getting a better rate, and will be glad you had the foresight to shelter your savings from the taxman. You can also now switch your savings between cash ISAs and stocks and shares ISAs, giving you greater flexibility in future.
3. NS&I 65+ Guaranteed Growth Bonds. Over 65s can use ‘pensioner bonds’, though these are taxable, and you must wait for one or three years to get the full interest. These are available until 15th May 2015.
4. Government and corporate bonds. You’d be a brave investor right now to turn to the bond market for income. With gilts yielding 1.8% and corporate bonds yielding 3.4%, you aren’t getting much compensation for the risk that prices may fall from already very high levels.
Investors who do want some bond exposure might consider investing in a Strategic Bond fund, which has the flexibility to invest across the bond spectrum and hopefully offer some protection if bonds start selling off. M&G Optimal Income currently has a yield of 2.9% (variable, not guaranteed). If investing in this sort of fund you should do so with a long term time frame in mind, in other words 5-10 years or more.
5. Stock market funds. If you have cash savings which are for long term goals (again 5-10 years or more), consider investing this money in the stock market. This comes with the additional risk you will get back less than you invest, so you should be willing to take this on board.
Equity Income funds are a relatively defensive way to play the UK stock market. By investing in higher yielding shares managers are naturally led to more undervalued areas of the market, and because of their income focus, the dividends provide a cushion against price falls. Funds like Woodford Equity Income (yield 4%) or Artemis Income (yield 3.6%) could fit the bill. (Yields are variable and not guaranteed).
For a more defensive fund consider Newton Real Return. The fund invests in a core of equities and bonds, but supplements this with other assets such as commodities and currencies. The fund switches between these assets depending on fund manager Iain Stewart’s outlook. The idea is to use the flexible framework to achieve a reasonable level of growth, but with an eye on capital preservation. It doesn’t look to provide a specific level of income, instead it focuses on total returns. The fund can, and does fall in value however, so it is still significantly riskier than cash.
Chart: Money held in non-interest bearing accounts by UK households