/ Money

Interest rate rise: good news for savers?

Pensions savings

Despite a 0.25% bump in the base rate last week, interest rates remain well below inflation and have for nearly a decade now – so, have you spurned savings accounts and invested your money elsewhere?

The Bank of England base rate has been below 1% for nearly a decade now and it’s been an unrewarding period for anyone with money in a savings account.

While the news last week that the base rate was increasing by 0.25% was welcome news for savers, it’s unlikely to be enough – especially as many banks have already said they’d not be passing this on in full to savings accounts.

And this isn’t unusual: when the base rate last increased in November, less than a quarter (21%) of variable instant-access savings accounts passed it on in full to savers, and nearly half (48%) didn’t change their rate at all.

With inflation creeping beyond 2.5% after the Brexit referendum (well above interest rates on most instant access accounts), many savers are still looking for alternatives.

Risk vs Reward

This prompted our community member Wavechange to ask:

How will pensioners be affected, since continuing low interest rates may leave them unable to maintain their income without risky investment of their dwindling savings?

Which led me to wonder how many people have spurned low-risk strategies in favour of higher-risk investments that may offer greater returns.

A recent survey by an investment firm specialising in retirement suggests the picture’s far from clear.

The Retirement Sentiment Index from Retirement Advantage found that market volatility was putting off increasing numbers of over-50s from investing in stocks and shares.

Nearly two fifths of respondents to the survey said they were unwilling to take any financial risk with their pension pot, up from a quarter last year.

But the key to a comfortable retirement is investing in a way that allows your pot to generate an income for you later in life – you can find out more in our guide to planning your retirement.

Playing it safe

Personally, I have a small amount of money invested in National Savings and Investment (NS&I) premium bonds.

The average prize rate rate on them overall is 1.4% (though this isn’t guaranteed for each holder as it’s a prize draw), which is still below inflation but isn’t bad compared to many savings accounts.

And you get a giddy thrill when NS&I email you occasionally at the beginning of the month saying you’ve won something – could it be the £1m prize?

But honestly, I’ve found premium bonds a pretty good place to park my savings until I can come up with a longer term idea on what to do with them – something that really requires a lot of careful thought and planning, which I haven’t done yet.

Though I do understand that premium bonds may not be the best position for everyone, especially those in or near retirement.

Other options?

On the other end of the investing spectrum, Which? Money have compiled some of the weird, wonderful and downright woeful investment schemes they’ve come across, including burial plots, car parking space, cryptocurrencies endorsed by ex-footballers and soybeans.

But being serious again for a moment, Which? Money’s have put together a comprehensive guide on how to build an investment portfolio, if that is a route you choose to go down.

So how have you invested your savings, if you have any? What would be your advice for others looking beyond low interest savings accounts?

Comments
DerekP says:
8 August 2018

Not yet – but I probably should have…

To be serious about saving proactively it is necessary to spend a considerable amount of time worrying about money issues. The risk of losing ones capital is more serious than the slow drain that poor savings interest and inflation make on bank and building society accounts. There is no such thing as foolproof stocks and shares, so to minimise loss and maximise gains it is necessary to have a spread of shares taking rises and losses in a balanced way. There are fees to pay out of capital whether one gains or looses. The problem here is that this is a relatively long term strategy and this makes it difficult to extract money in a hurry for a major purchase. It also means being up to date with what the money/share markets are doing and that, of course, means time and expertise. Premium Bonds are also a gamble and one can’t guarantee a regular income from them. Like all such investment there is the thrill of a possible big win, and the reality of months without anything. High interest current accounts only allow for small savings and have numerous restrictions on what one can save and what one has to commit to paying in. It is easy to lose money very fast with a poor decision and I have many more creative things to think about than the stock market so I’ll continue to be cautious and to sleep at night.

It’s very difficult to better 1% on a consistent and accessible basis combined with acceptable risk. Stocks & shares have been doing reasonably well lately but the future is very uncertain and dividends are marking time. Property has lost its shine as a capital investment and income is not reliable. ISA’s are good if you can keep them going for several years at the maximum level in order to benefit from the tax advantages. I think Premium Bonds are a useful part of a savings plan as a third priority investment. Putting some effort into reducing expenditure can be just as rewarding and should not be neglected: energy economy, smarter shopping, fewer miles, a simpler entertainment package, eating in, reviewing insurance policy cover, stopping auto-renew subscriptions and memberships : OK, all one-offs, but cumulatively they take the pressure off the budget. And don’t forget to pay off existing loans and debts before investing.

I like the gamble of premium bonds – the security of the capital plus the lure of a large prize – someone wins them! I reckon our bonds have, on average, paid about 1.4%, tax free. However if you are just looking at income I’d go for stocks and shares, particularly funds, with a good spread of investments. Put them in an ISA and both capital gain and interest are free of tax. You could expect a 3-4% return. There is the risk of capital losses but generally they should show real growth long term. But, if you may need access to the capital at short notice, there is a risk involved.

The security of the capital was a plus point for Premium Bonds during a period of low inflation but as inflation rises the lack of capital appreciation puts more pressure on the yield which always seems to drag. For this reason I feel they should not be regarded as a first choice or even a second choice investment but the surprise factor does have appeal when all other savings bases have been covered.

As with many investments, you need to be wealthy to start with to make a go of stocks and shares so you can weather any storms and buy enough to make the investment worthwhile while keeping dealing costs down. Compounding the dividends back into the holding as offered by some companies can improve yields. Using an S&S ISA is a good way to start small and build up progressively with the tax advantages Malcolm has mentioned once the total capital gains tax value and the annual income exceed the normal tax exemption levels. For many people, however, a better long-term investment might be through additional voluntary contributions to a workplace pension scheme or a good with-profits life assurance policy. Many other good savings and investment products are available and NS&I products are underwritten by the UK government. The yields might not be spectacular but depending on age and circumstances that might not be the prime consideration.

I will wait and see what happens within the next month by making a move. Low interest rates have made me rather complacent. For a couple of years I bought and sold shares and then realised there are more interesting things to do with my life, so I prefer safer investments and to have sufficient readily available money to cope with unplanned expenses. The biggest uncertainty for me is Brexit and how this will affect my savings.

I think I will cope but to repeat my concern expressed earlier, how will pensioners be affected, since continuing low interest rates may leave them unable to maintain their income without risky investment of their dwindling savings?

You don’t have to buy and sell shares to produce income. There are plenty of funds about that invest in a spread of shares, that you keep, and that will produce an income, higher than letting it sit in a bank.

I don’t see how interest rates have really had much effect on income for any saver, unless you have a very large saving pot. £100 000 would only produce around £1000 or so a year. Who has that level of savings and, if you had, i’d expect it to be more profitably invested. What matter with interest rates is the gap between them and inflation; over the last 20 years that has been around +1 or 2% so the real income is quite low.

Many people, and a lot of pensioners, will not have the luxury of a savings pot that would ever produce a decent income; many, at best, will have enough for emergencies. This is why we must encourage people to save for their retirement from an early age, even if that may be a struggle. It will be even more of a struggle if they don’t when retirement arrives.

That’s exactly what I do, Malcolm, and have done since my mid-20s, when my father encouraged me to invest in unit trusts. I tried buying and selling shares because friends did. Yes it produced a higher yield but it did not interest me.

There are many reasons why many have not made adequate provision for their retirement including failure of pension schemes and poor health, but nowadays the obsession with spending money in our materialistic society seems to be a contributor.

When I can still get a personal loan at 2.9% APR their doesn’t seem much scope for increasing interest on deposits.

Geoffrey Higginbotham says:
11 August 2018

Therein lies the problem malcolm r. Too many older people have had to pay up to 15% interest on their mortgages and with ultra low interest rates, it is no wonder I cannot get a better return on my money.

But of course it benefits those who want mortgages or personal loans. Some are winners. But you cannot expect high interest rates when loan rates are low – the differential is there to cover the banks’ overheads and margin.

I think it is time to treat bank accounts like car insurance and utility bills, review and switch every year if there is a better offering out there.
Some banks are offering 5% on a limited amount of capital, ie £2500 in one, £1500 in another, but a couple can have one each and a joint in both banks with a few hoops to negotiate, while some offer freebies or cash, one offering £185 with conditions.
Switching or opening an account is quite strait forward, but the effort is much more rewarding than the normal low interest rates in most accounts.

Geoffrey Higginbotham says:
11 August 2018

I wonder what would be the outcome if ALL savers took their savings from the greedy bankers and “left it under the pillow” for a while. Surely without OUR money they will have no cash to lend, or would they go with their begging bowls to the Chancellor and beg for more “quantative easing”?

I think the availability of money through that route has meant they were not reliant on savers deposits to service loans, hence why should they pay more interest than they had to? You could put your money under the mattress (no need for ATMs then either 🙂 ) but you would lose what little interest that was paid. The banks would no doubt miss it, and want to attract deposits back so would entice people with appropriate interest rates – until they had enough money, which takes us back to where we are now.

Unless you must have ready access to savings, I’d not put it in the bank but buy a good spread of stocks, shares and bonds through collective funds. They can be sheltered tax free in an ISA and should not only produce an income 3 times interest rates, but capital growth as well. That would leave the banks short of cash deposits if most took that route, and thus cause interest rates to be increased. It is simply the law of supply and demand.

Geoffrey Higginbotham says:
11 August 2018

I think everyone should be made aware of the banks ultimate intention to do away with CASH and CHEQUES. I go to my local shop daily, often buying only a couple of newspapers, if I am unable to pay with cash then I must use a bit of plastic. The banks will make a charge for processing the transaction so the shop will either lose money or lose their profit, ultimately the price will rise to take account of the banks costs and I will find my costs are increasing because there is no such thing as money. BEWARE YOU HAVE BEEN WARNED.

I think this is not the case. Cheques are being perpetuated as far as I can see, and photo technology is now made available to clear them more cheaply and more quickly. And I believe we will always need cash. Many changes – debit, credit, contactless, oyster type cards – have been made to avoid the need to extract cash form the bank and carry round a pocket full of coins. I see those as supplementary to, not replacing, cash. I don’t know of a cashless society anywhere in the world – do you?

I mentioned recently that B&Q is stopping taking personal and business cheques and I don’t think many shops take them now. Tesco and Marks & Spencer stopped taking them ten years ago. Our local branch of Kall Kwik was one shop that would take cheques but moved to online payment and then accepted cards. We can still exchange cheques, but when the banks decide to have another attempt to phase them out I don’t envisage much opposition.

As has been suggested by many people, phasing out convenient ATMs is helping to push forwards a cashless society. The only hiccup in this gradual change is that many small traders now decline card payments for small amounts, often up to £10, now that card surcharges have been banned. London Transport only takes contactless cards. I envisage that cash will remain for a while yet but use will decline.

Cheques have been invaluable to small charities who cannot afford card readers but I’m presently looking at contactless card readers for a small charity. We have members of the public who are happy to donate but have no cash.

I think cheques lost there acceptability with many businesses when the cheque guarantee card bit ceased. However they survived the last attempt to phase them out so I suspect they’ll be with us for some time. They are convenient for many transactions but, like bank branches, if we stop using them as much then they will disappear.

Hopefully phasing out convenient ATMs will be limited to reducing the herds that seem to inhabit parts of towns and cities. I’d like to see alternative cash withdrawal methods set up for the many people who have never been within convenient access of an ATM. Let’s think about improving the situation by whatever means, not just protecting those who have the convenience already.

2018 was when the industry planned to phase out cheques but there was considerable opposition and plans were shelved. I used to offer cheque or card payment regularly but no-one seems to want cheques these days except charities. I still receive some cheques as dividend payments but now write only about ten a year. I expect you will remember our discussions with globetrotter NFH who said that cheques had already been phased out in some countries. It’s difficult to guess how long they will survive.

I get cheques from a few businesses each year and NS&I pay premium bond winnings that way unless you elect to have them reinvested.

I issue them much less because I use on line bank transfers for repeated payments but for single transactions to traders who don’t take credit cards I’ll send a cheque rather than set up a new transfer that will never be used again.

For those who do not use online banking I would have thought cheques were essential.

I support retention of cheques. We have both given examples of where they remain useful.

I will be writing a cheque tomorrow and it’s going to be for a one-off payment. I have to post an application form and it’s easier to enclose a cheque than do an electronic transfer. Perhaps we should be prepared with as many valid reasons as possible and be ready when the banks have another go at phasing out cheques.

I believe we are reaching the point where businesses are issuing more cheques than personal customers even though most routine payments like salaries and dividends are paid via BACS. From time to time I receive cheques from companies for small amounts [a goodwill gesture from British Gas for mucking up my boiler service appointment comes to mind, and a small sum from a company that has closed an account scheme]. These are not situations where it would be efficient for the payer first to request the payee to supply all their bank account details – or where the payee would be happy to do so. Insurance companies tend to use cheques for pay-outs and when our previous house was sold I opted to receive a cheque rather than pay extra for an on-line transfer [even though the cost was miniscule in the overall scheme of things!].

You must be with the wrong bank. My bank doesn’t charge for using Debit Cards either for purchases, or getting cash from an ATM machine.

Jim Allison says:
24 August 2018

If you don’t wish to have Premium Bonds paid by cheque, you can opt to have them paid into your bank account.

Let’s hope I’ve got the noughts in the right place :-

We complain about poor interest rates. The banks have paid out around £6bn (£6 000 000 000) a year since 2011 in PPI compensation. That money has to come from somewhere – the customers. That would have been the equivalent of paying 60 million people with an average £10 000 of savings an extra 1% in interest a year – around double what they currently get.

I wonder if all the PPI payout were genuine, or whether the banks have just taken the easy route at the expense of all their savers? Just an idle thought.

Is there any evidence that payments have been made when PPI has not been mis-sold? If so, the Financial Conduct Authority should be informed. The latest magazine refers to a Which? member who recovered £16k. The deadline for PPI claims has now been set and will not change.

I would have preferred if the companies that had mis-sold PPI had contacted their customers and issued refunds plus interest, rather than having legal firms spending a fortune on advertising and legally taking part of the money due to those who had been scammed.

The problem was that with many of the organisations that were alleged to have mis-sold Personal Protection Insurance, when compensation was claimed, they either did not know whether or not they had mis-sold it or they could not prove that they had not mis-sold it, so compensation was paid out. I presume that the £16,000 compensation paid to the Which? member was a refund of all the policy premiums and I also presume that there was no deduction for the fact that insurance cover had been provided since the person stated that he had not wanted payment protection. The underlying loan must have been enormous.

From the context of the article it is likely that this was PPI on a business loan.

It is a requirement that citizens of this country keep financial records so that they can pay the correct income tax. Claims for insurance that has not been mis-sold should obviously be rejected. Banks arranging payment protection cover should keep proper records or they should not be in business. If there is evidence that inappropriate compensation is being paid then this should be investigated.

From the amount of compensation already paid out [£6 bn a year for seven years according to Malcolm (above)] I find it inconceivable that a significant amount was not paid without full justification because either banks could not produce the relevant records or because proper records were not kept in the first place. It is likely that the banks were so keen to charge for PPI whether the customer requested it or not that it became an automatic administrative procedure to slip the PPI premiums into the monthly direct debit for the loan repayments in the expectation that the customer would be none the wiser. Then it all fell apart and all of us are worse off as a result. The burden of proof was on the banks to show that they had not mis-sold the policies or had made a proper fact-find of the customer’s circumstances and requirements before setting up the policy and charging for it. I expect in many cases they just gave up and conceded.

I’ve never taken out PPI on a mortgage or loan. They did not seem to be cheap premiums – I see figures of 15 to 25% of the loan, for example, which are substantial proportions. Up until a year ago 12 million people had claimed, I estimate £40bn plus.

I just have this question niggling in my mind. Are there 12 million people who did not look into how much extra PPI was costing therm, on a mortgage for example, and never asked themselves whether it was value for money or even needed? Did they just sign on the dotted line without a second thought? Were they all really that naive, or lacking any financial sense?

I’ve just read of one person who claimed six times on his PPI policy when he was sick, and yet still claimed it was mis-sold because his company had a good sick pay scheme.

I expect I’ll now get 40bn thumbs down, but I just pose the question because it seems such an extreme situation. However, I’m sure (I hope) someone will explain how that happened.

I think the emergence of claims management parasites had a lot to do with the number of claims, Malcolm, and the likelihood that many of them might have been of an expeditionary nature which, under the pressure of a scandal fomented by consumer journalism, were simply conceded. That would naturally have created a precedent and set the snowball rolling and the banks are ruing the day they followed that course of action – at our collective expense, of course..

One of the ways you could claim PPI was mis-sold was because the banks might have taken a big chunk of commission from the insurers without disclosing this to the customer. (Plevin).

I wonder if the claims management companies might be next on the list for mis-selling their services by taking so much commission for themselves?