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£160bn of savings ‘obliterated’ due to rock bottom interest rates

Written by: Paloma Kubiak
Savers have missed out on an estimated £160bn of interest payments because of the record low base rate, according to analysis.

Since the financial crisis, cash savers have seen returns on their deposits “all but vanish” as the Bank of England base rate has been held at 0.5% for nearly seven years.

Analysis by Hargreaves Lansdown of Bank of England statistics estimates cash savers have lost a combined total of £160bn, or £6,000 per UK household, in lower interest payment compared with September 2008, before the rates were cut.

The interest rate on an instant access deposit account has fallen from 3% in September 2008 to just 0.8% now.

There has also been an explosion in assets held in bank accounts paying no interest at all with the amount of money held in these totalling £164bn, according to Hargreaves Lansdown.

Laith Khalaf, senior analyst at Hargreaves Lansdown said: “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.

“The current low inflation environment does at least mean cash returns don’t look quite as rotten as they might, though that will be pretty cold comfort to savers.”

With the market not expecting a rate rise in the UK until 2017, what options do savers have?

Options for savers

Khalaf gives a run-down of five things savers can do:

Grin and bear it. Everyone needs a cash buffer to meet immediate spending needs or when money is needed within the next five 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.

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.

Government and corporate bonds. You’d be a brave investor right now to turn to the government 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.

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. 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%.

Peer to peer lending. 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.



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