3rd February 2016
Cash savers have lost an estimated £160bn following seven years of low interest rates, new analysis suggests.
The base rate has now been stuck at 0.5% since March 2009 and the Bank of England is not, it seems, looking to hike anytime soon given it decided to keep interest rates on hold at its February policy meeting.
Since the financial crisis, cash savers have seen returns on their deposits all but vanish. Hargreaves Lansdown estimates they have lost £160bn in lower interest payments, compared to the rates they were receiving before the financial crisis.
Interest rate markets are now pricing in a higher probability of a rate cut this year, than a rate rise.
Laith Khalaf, senior analyst, Hargreaves Lansdown, says: “Loose monetary policy has obliterated the returns enjoyed by cash savers, who now face an eighth year of rock bottom interest rates, with little sign of any respite. Cash has been trashed, while shares and property prices have been given a leg up by the low cost of borrowing.
“Looking forward, the plunging oil price has taken over from the global financial crisis in discouraging the Bank of England from raising interest rates. The deflationary effect of cheaper fuel and energy is likely to keep policy makers hiding in their dovecotes for some time to come.”
He added that markets are now pricing in a higher chance of an interest rate cut than a rise this year.
“At the moment UK monetary policy is being held in check by two opposing forces; low inflation on the one hand, and a growing economy on the other. Should the economy falter, the scales will start to tip towards loosening monetary policy once again, either through an interest rate cut, or more quantitative easing,” added Khalaf.
Cash savers lose £160 billion
Calculations by Hargreaves Landown estimate that lower interest on cash deposits have cost savers around £6,000 per household, or £160 billion, compared with September 2008 levels.
Meanwhile, there has been an explosion in assets held in bank accounts paying no interest. The amount of money held by households in non-interest bearing accounts now stands at £164bn, compared with £33bn at the beginning of 2008.
The average interest rate on an instant access deposit account has fallen from 3% in September 2008 to just 0.8% now. Other assets have rocketed in value since interest rates were cut to 0.5%.
Here are the returns, both before and after inflation, of UK shares, property, bonds and cash since 5th March 2009, based on each £1,000 invested. Cash held in the average instant access account has actually lost some of its buying power once you take account of inflation.
|Total return since 5th March 2009|
|Before inflation||After inflation|
|Average instant access account||£1,060||£905|
|Average UK stock market fund||£2,406||£2,053|
|Average UK house||£1,321||£1,127|
Sources: Lipper Hindsight, Bank of England, Nationwide House Price Index
Hargreaves sets out five options for savers:
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, or when money is needed within the next 5 years, so there is no way of totally avoiding low deposit rates. It makes sense to shop around for the best deal for your savings however.
2. Put your savings in an ISA. The tax protection afforded to you might seem pointless right now, 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 and stocks and shares ISAs, giving you greater flexibility to react to changing circumstances.
3. Government and corporate bonds. You’d be a brave investor right now to turn to thegovernment bond market for income. With gilts yielding 1.6%, you aren’t getting much compensation for the risk prices may fall from already high levels. Corporate bonds are currently yielding around 4%, which looks OK, but you have the added risk of company defaults to bear.
4. Stock market funds. If you have cash savings which are for long term goals (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. If you need income then a UK Equity Income fund might be a good port of call. These funds typically provide a yield of around 4%, with the potential for both income and capital growth.
5. Peer to peer lending. In response to falling interest rates many savers have turned to alternative finance to provide better returns, and peer to peer lending platforms have been at the forefront of this trend. These platforms allow individuals to lend money directly to other individuals and to companies, typically picking up an attractive rate of interest in return. There are of course risks, in particular that the person or company you lend money to fails to pay it back. Different lending platforms have different ways of protecting investors from such events.