Is Cash Still King?
Interest rates on savings accounts have remained stubbornly low for some long time now, according to Money Saving Expert, the best unrestricted, instant access account is paying just 1.50% per annum before tax.
National Savings & Investments, where there are no Financial Services Compensation Scheme (FSCS) issues, pays 1% per annum before tax on their Direct Saver account.
Why have interest rates stayed low?
The Bank of England held rates at just 0.50% from 05 March 2009 to 03 August 2016 (0.25% since).
The Banks and Building Societies have improved their cash position since the “Credit Crunch” and don’t need to offer premium rates of interest to entice Depositors.
The Government has put pressure on Lenders to pass-on the full benefit of the lower interest rates to Borrowers, particularly Mortgagees and Business.
How much longer will this continue?
There are many factors that impact the decisions made by the Bank of England’s Monetary Policy Committee when they meet on a monthly basis to consider interest rates, but, currently, there is no sign of them moving away from the historic low rates we are currently experiencing. Some forecasters are predicting a rises but this very much depends upon the state of the Economy at the time, which, of course, is very unpredictable as we await the impact of Brexit.
What is the impact of these reductions?
The key issue is that of inflation and the “real value” of money on deposit. If inflation averages just 2½% per annum, the value of the pound in your pocket reduces by one-quarter every 12-years. Even with interest accumulating, with rates as low as those currently available, those balances are not keeping pace with inflation.
According to the Office for National Statistics, CPI (Consumer Price Inflation) was 1.8% per annum in February 2019 and RPI (Retail Price Inflation) 2.5%. However, is that your rate of inflation? The BBC has a very useful inflation calculator on its website, which can be very revealing in terms of what your true rate of inflation could be. Whichever way you look at it, interest rates are definitely not keeping pace with inflation.
People on lower incomes, especially Pensioners, tend to experience an elevated rate of inflation compared to people on higher incomes. The reason for this is that the items which tend to go up fastest represent a significantly higher proportion of the expenditure of someone on a lower income.
Certainly, in the recent past, Council Tax, gas, electricity and food prices have increased much faster than the general rate of inflation.
Although somewhat out-of-date, a Barclays Capital analysis in 2014 of the rate payable on the Nationwide InvestDirect Account adjusted that for RPI and this showed that, in real terms, the return had been as follows for the previous 7-years:
- 2008 -0.2%
- 2009 -2.1%
- 2010 -4.6%
- 2011 -4.6%
- 2012 -2.9%
- 2013 -2.5%
- 2014 -1.4%
What this meant was that £10,000 at the beginning of 2008 was worth £8,300.62 in real terms (the goods and services it could buy) by the end of 2014 with gross interest reinvested. Of course, Pensioners often have to withdraw the interest earned to supplement their pensions, in which case the loss of buying-power is even more pronounced.
What can you do?
The first point to make is that everyone should have a prudent cash reserve for known and unknown contingencies. How much that should be is highly personal, but I recommend between 3-months and a year of basic expenditure, plus any known requirements for, say, the next 3-years. This needs to be kept in cash on deposit in a fairly accessible form, keeping in mind the FSCS limit of £85,000 per depositor per financial institution.
Beyond this, there seems to be a strong case for considering some form of investment to achieve returns potentially better than inflation in the medium (3-years +) to longer (5-years +) term. This can be done without “throwing the baby out with the bath water” in terms of investment risk.
If you think you have too much in cash and want to consider investing some, then ask me today or complete the form below and I’ll give you a link to our risk profiling tool to start the advice process.