The nation’s nest eggs have been left at the mercy of inflation for a decade by the pitiful interest rates offered by the banks.
And after ten years of rock-bottom rates, more than £100 billion of spending power has been lost to the march of rising prices, analysis for Money Mail today reveals.
The Bank of England decided against hiking the base rate from a record low of 0.1 per cent last week, and at the same time predicted inflation could peak at 5 per cent next year.
Inflation strikes: And after ten years of rock-bottom rates, more than £100bn of spending power has been lost to the march of rising prices
This was good news for borrowers, who have enjoyed cheap mortgage rates for years, but bad news for long- suffering savers.
The base rate has been lower than 1 per cent for more than ten years after it was cut to 0.25 per cent following the financial crisis.
Yet inflation has remained close to 3 per cent, on average — peaking at 5.2 per cent in 2011.
Anna Bowes, co-founder of the advice site Savings Champion, says a base rate increase would ‘have signalled the end to a decade of low interest that has decimated savers’ hard-earned cash’.
She adds: ‘Savers have been sacrificed to the benefit of borrowers for too long.’
So as inflation is tipped to take a bigger bite out of our savings, is it still worth putting up a fight?
Inflation has totalled nearly 20 per cent over the past ten years — making £10,000 then worth £8,368 now, according to broker AJ Bell.
Easy-access accounts have returned an average of 6.42 per cent, notice accounts 18.6 per cent and cash Isas 15 per cent over the decade.
Measly returns: There is close to £250bn in accounts that pay no interest – meaning savers are missing out on nearly £1.7bn in interest a year
Households had more than £1 trillion saved in 2011. The analysis by AJ Bell shows that cash would now be worth £73 billion less.
This loss in spending power rises to more than £100 billion if all the deposits made over the decade are included.
Laith Khalaf, head of investment analysis at AJ Bell, says: ‘Cash has been crushed by inflation over the past decade, even though price rises have been extremely modest, thanks to the Bank of England’s ultra-low interest rate policy.
‘Low savings rates look here to stay, but inflation is taking off in a big way.
‘Hopefully, this current bout of inflation will be short-lived, but even if it is, at 5 per cent it can still do significant damage to cash in the bank.’
Rates going up?
The big High Street banks are not worth considering while they offer a measly 0.01 per cent on easy-access savings. The best rate is 0.67 per cent with Shawbrook Bank.
Experts say things are now looking better. The gap between the best- and worst-paying accounts was 0.4 per cent in April.
Record low: The Bank of England’s base rate has now sat lower than 1% for more than ten years after it was cut to 0.25% following the financial crisis.
Sarah Pennells, consumer finance specialist at insurer Royal London, says: ‘An extra 0.5 per cent interest can make a difference, especially if you have a lot in cash savings.’
There are more than 1,639 savings accounts on the market — the highest number since March 2020, when there were 1,768, according to data firm Moneyfacts.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, adds: ‘It may not feel that way, but rates are better than they have looked for a while.
‘Compared with a year ago, the best fixed rates over each period are higher. The best rate over two years has more than doubled. Rates are low, but have been lower.’
Ditch & switch
There is close to £250 billion in accounts that pay no interest — meaning savers are missing out on nearly £1.7 billion in interest payments a year.
Research from Hargreaves Lansdown found half of savers had not switched accounts in the past five years, and close to two in five had never done so.
The survey found the main reason was rates were too low to bother with, while others said they trusted their bank and did not think it was worth the hassle.
But Ms Bowes says: ‘It’s really important to know what you are earning, and switch to something better if you are not being offered a fair deal.
‘The better the interest earned, the more this will mitigate against the damaging effects of inflation.’
Lock up a deal
Savers can better protect their money against rising prices by locking it away.
If you can afford to wait 120 days to access your money, Shawbrook Bank offers the top-paying notice account at 1.08 per cent.
Safe haven: If you can afford to wait 120 days to access your money, Shawbrook Bank offers the top-paying notice account at 1.08 per cent
You can get 1.35 per cent with Zopa’s fixed-rate deal if you lock your cash away for a year.
If you are happy to fix for two years SmartSave will pay you 1.6 per cent, and over three years you can get 1.81 per cent with JN Bank.
The best rate around is 2.05 per cent with a five-year fixed-term Woodland Saver account offered by Gatehouse Bank.
Recent Moneyfacts data reveals demand for fixed-rate bonds doubled over the past six months.
But Ms Coles says fixing is not without risks as you could miss out on rate rises.
She says: ‘The market expects the Bank of England to raise rates by 0.9 percentage points by the end of 2022.’
Hope with NS&I?
Savings experts say Treasury-backed bank National Savings and Investments (NS&I) could soon have to raise rates to pull in more money for the Government.
The bank, with more than 20 million Premium Bond savers, last year slashed rates to a pittance on most accounts — including 0.01 per cent on income bonds.
So far, the bank has pulled in just £600 million of its £6 billion fundraising target. James Blower, Savings Guru founder, says: ‘I am surprised we haven’t seen a rate [increase] announcement yet as they are way off their net financing target, with less than five months of their financial year remaining.’
The top cash Isa also pays 0.67 per cent. Isas are tax-free so you will not face an income tax bill on returns.
However, with rates so low you are unlikely to make more than the current £2,000 personal allowance on offer for ordinary savings accounts.
The top cash Isas currently pay just 0.6%. so you are unlikely to make more than the current £2,000 personal allowance on offer for ordinary savings accounts
An Isa allows you to save up to £20,000 a year, and Mr Blower says those who have used up their allowances in previous years, and have a big balance, could benefit from a ‘rate war’.
Hampshire Trust now pays 0.95 per cent on a one-year fixed account — nearly twice the best deal that was on offer in March.
But Mr Blower says: ‘Unless you are an additional rate taxpayer, or have maxed your personal savings allowance, I’d look at ordinary savings accounts because they are paying much better rates.’
Waiting on watchdog
Money Mail’s ‘Stop Shortchanging Savers’ campaign, which was launched in 2019, called on banks to pay loyal savers fair rates.
The Financial Conduct Authority (FCA) proposed forcing banks to pay their own minimum rate in a move that would hand an extra £381 million in interest rate rewards to loyal savers, and boost competition in the market.
But the plans were shelved during the pandemic because interest rates fell so low, meaning that enforcing a minimum rate would make little real difference.
The financial watchdog has also said it wants to see fewer savers hoarding large sums of cash that could perform better on the stock market.
Baroness Ros Altmann, a consumer campaigner, says it is unlikely the FCA will reconsider the plan anytime soon, and that even a rise in the base rate might not trigger interest rate increases.
She says: ‘Whatever savings rate you get is not going to get anywhere close to inflation.
‘The Government probably wants people to invest their money rather than save it, or it wants them to spend their savings to keep the economy going.
‘It’s really worrying because in the long run we need domestic savings to cover hardship.’
The FCA was contacted for comment.
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