Low interest rates getting lower – Hargreaves Lansdown sets out five point plan for savers

12th July 2016

Cash ISA rates are already at historic lows averaging 0.82% (source: Bank of England) having fallen 65% over the last 5 years says Hargreaves Lansdown.

Interest on a typical 90 day deposit account has fallen by 82% over the last 10 years. Whether a cut in interest rates this week will make that much difference to the economy is not the primary point – it will be an attempt to show a firm hand on the tiller.

Danny Cox, Chartered Financial Planner, Hargreaves Lansdown says:  “The first interest rate move in over 7 years will be in entirely the wrong direction for savers. Since the financial crisis, rock bottom interest rates have turned savers’ cash deposits from powerful income generators to clapped-out bangers.

“Savers continue to feel the pain of low returns on cash, as interest rates look set to be cut and remain in the doldrums for even longer. Even when the worm starts to turn, interest rate rises are likely to be slow and steady. Savers therefore face several more years of low returns on their hard earned cash. They can’t change interest rate policy, but there are firm steps savers can take to make more of their money.”

He suggests a five point action plan.

Savers 5 point action plan

  1. Pay down debt

The cost of borrowing is almost certainly higher than the returns on your cash accounts.

  1. Shop around

80% of people with easy access accounts haven’t switched over a 5 year period (source: FCA) and yet this is often the best way to improve the returns on your cash. Cash ISA accounts can be switched to a new provider in 15 days or less.

  1. Use your tax breaks

Fully use your personal allowance and the new personal savings allowance. Combine these and a basic rate taxpaying couple can receive £24,000 in income and interest this tax year, completely tax free.

  1. Use ISA allowances

An ISA shelters interest from the taxman and this can improve your overall returns. Even with the new personal savings allowance, using your ISA allowance is good tax saving discipline.

Certain types of ISA have other benefits: Help to Buy ISA provides a 25% government bonus to first time buyers when they buy a property. From April 2017, Lifetime ISA will also provide a 25% bonus to savers under 40 either to help first time buyers onto the property ladder or for longer term retirement savings.

  1. Consider switching some long term savings from cash to the stock market

While income from a £10,000 cash deposit has fallen by 86% since 1996, dividend income from a popular equity income fund has remained steady. However when you factor in the growth in the capital value which in turn grows the dividends, the income has increased by 268% (and the capital increased to £39,930).  It’s important to hold some cash, but not too much.

Income over 20 years from £10,000 starting capital

  Income from equities with capital growth 90 Day Notice
Cash Account
1996 £346.18 £430.76
1997 £375.15 £484.23
1998 £394.62 £547.05
1999 £543.45 £370.18
2000 £555.17 £402.26
2001 £607.32 £363.01
2002 £605.31 £268.92
2003 £716.21 £247.26
2004 £474.94 £315.02
2005 £668.91 £348.99
2006 £809.75 £343.62
2007 £1,018.60 £428.04
2008 £1,045.60 £398.25
2009 £1,087.87 £116.48
2010 £1,061.18 £105.20
2011 £1,133.98 £117.51
2012 £1,165.97 £125.50
2013 £1,186.50 £90.44
2014 £1,256.95 £69.58
2015 £1,274.45 £60.36
Total income taken £16,328 £5,632
Capital remaining £39,930 £10,000

 

Source: Lipper, Invesco Perpetual High Income fund v  Moneyfacts 90 Days Notice Cash Account

 

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