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Ten years of rock bottom interest rates has cost savers £188bn

Tomorrow marks the 10-year anniversary of the Bank of England cutting interest rates to 0.5%.

And during that time, savers have collectively missed out on at least £188bn – the equivalent of £7,101 per household, according to investment platform Hargreaves Lansdown.

Sarah Coles, personal finance analyst at the firm, said: “We’ve lived through a miserable decade for savers. The Bank of England slashed rates from 4.5% to 0.5% between November 2008 and March 2009, and followed this up by offering enormous quantities of cheap money to the banks. As a result, banks lost interest in competing for savings, and savings rates collapsed.

“Over this lost decade for savers, when you compare rates before the cuts to the rates we saw throughout, we’ve missed out on at least £188bn.”

Making matters worse, money in non-interest bearing accounts has shot up from £47bn in September 2008 to £165.9bn today.

But luckily there are simple steps that savers can take to make sure they get a better rate of interest from their savings.

“While interest rates remain historically low, newer banks and building societies are competing for your cash. It means that by switching you could get a much better deal,” explained Coles.

“You can switch easy access funds earning just 0.25% and make 1.5% – six times the interest. The advent of online savings marketplaces also makes switching far easier, as you can move between accounts with different banks in just a few clicks,” she added.

Coles notes that savers can get more than six times their current interest rate in three easy steps:

1) Split your savings

The first step is to split your savings into different pots. Three to six months’ worth of expenses should be put aside in a competitive easy access account to use as an emergency savings safety net, with the rest freed up to work harder.

2) Fix

It is then a case of dividing out the money that isn’t required immediately into different pots, depending on when you’re likely to need the cash.

Each of the pots should then be fixed for various periods – between six months and five years – depending on what suits you best. If the money is not required for five to 10 years or more, Coles suggests considering stock market investments, which should offer superior growth over the long term as well as the prospect of outpacing inflation.

3) Shift

Coles acknowledges that this final step is the most challenging, which helps to explain why half of all savers haven’t shifted their money over the past five years.

The Financial Conduct Authority, the regulator, found that savings accounts that had been held for five years or longer paid an average of 0.82% lower rate than those opened in the previous two years. With this in mind, Coles says it is worth considering an online savings marketplace, which will make it easier to spot better interest rates available.

The outlook for interest rates

One of the biggest challenges that savers have faced has been the expectation that interest rates would return to more normal levels sooner. For example, at the end of 2009, markets expected interest rates to be back to 4% by the end of 2012.

However since the European Union referendum, expectations for interest rate hikes have been much less upbeat

Looking ahead, markets are forecasting that interest rates will be a little over 1% in three years’ time, with a 51.7% chance of an interest rate rise this year.

Source: Your Money

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Savings rates beat property price growth

Investing your money in a top savings account over the last year will have earned you more money in returns than the property market, new research has found.

Mutual insurer, Royal London, has discovered the best-buy interest rates were now higher than the annual average property price growth in England.

It came to the conclusion after analysing Land Registry figures, which showed the average home in England grew in value by 2.6% in the past 12 months to £247,430. Meanwhile, the best fixed-rate savings bond, as highlighted by analysts at Moneyfacts, was a seven year deal paying out 2.75% interest.

It means the best savings rate has performed better than the average UK property. Even the best easy access savings account, which currently pays 1.42%, would be enough to beat house price rises in the slowest regions of London and the South East, some areas of which have seen price declines.

Becky O’Connor, personal finance specialist at Royal London, said: “Savings rates have been offputtingly low over recent years, as a result of the rock bottom Bank of England base rate. However they have risen slightly as the base rate has increased.

“Coupled with a decline in the rate of house price growth, this trend has resulted in the most competitive savings accounts now paying more interest annually than property owners typically earned in the last 12 months.

“While it is still difficult to beat inflation with most savings rates on offer, if you live in London or the South East, it is now easy enough to beat the current rate of house price inflation with a savings account.”

Royal London pointed out its research was based on savings accounts with the very best rate on the market. It said the rate and term of a savings account could make a difference to returns you end up with.

Indeed, the returns on individual properties could also depend on a number of factors, including its location and whether it’s a main home or a buy-to-let.

Tax advantages

Royal London is urging savers and investors to remember the tax advantages of pensions and ISAs when planning where to place their cash for the long-term.

O’Connor added: “It’s important to remember that property or savings accounts are not the only things you can do with your money for long term financial returns. Saving into a pension comes with significant tax advantages and over the long term, the performance of stocks and shares investments tend to outperform cash.

“Money that goes into a pension benefits from tax breaks whilst money withdrawn from an ISA is tax free.”

Source: The Money Pages

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How Brexit could hit your savings in 2019

If you’ve been sensible enough to squirrel away some money into savings, be it for a deposit on your first home, some side cash for a rainy day or, most sensibly of all, a pension, you’re probably thinking and fretting about Brexit.

What will happen when Britain formally leaves the European Union in March 2019 is still unclear. There is no obvious path forward as opinion on what to do next is so divided.

Will there be a second referendum? Will prime minister Theresa May’s deal ever get through parliament? Will the country crash out with no deal? And what will it all mean for the money I’ve so prudently set aside?

First, let’s think about the Bank of England’s base rate, which is currently set at 0.75%. In the event of a chaotic no-deal scenario, a run on the pound is likely. To protect sterling and fend off inflation, the Bank of England would probably hike rates sharply.

However, if there is no shock, perhaps because of some transitional arrangement or a poor deal, the Bank of England may cut interest rates again to stimulate the economy in the event of a slowdown, continuing the years-long pinch on savers.

As the Bank of England put it in its November 2018 Inflation Report: “The Monetary Policy Committee judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”

What if you have savings linked to investments in stocks and shares? Well if Brexit does go badly, the stock market will suffer badly, at least in the short term.

The firms exposed most of all to Brexit – those which do a large amount of business in the EU, such as banks – will probably take a big hit.

Much of that hit may well be priced in before the formal Brexit takes place if it is clear there will be no deal, though shares would likely fall further.

On the other hand, if Brexit goes smoothly – a decent deal, for example, that keeps goods, services, and capital flowing freely between Britain and the EU – that could be a boon to the markets, sending share prices up as investors regain confidence.

Another risk is sterling. Should the value of the pound crash after Brexit, and it is already low in anticipation of it, those relying on savings and living outside of Britain will see their incomes fall.

If you are a British pensioner living in Spain, for example, receiving your sterling-denominated pension each month, it will exchange into fewer euros.

Then there are bonds. A lot of pensions and savings accounts are invested in UK government bonds, known as gilts.

Should Brexit get messy, the value of existing UK sovereign debt will fall as gilts become less attractive in correlation with a higher risk of default by the government.

So if you hold any gilts, the value of your savings would fall too should a hard Brexit take its toll.

If Brexit goes really badly, some financial institutions could even close their doors, just like in the 2007-8 financial crisis. That is a major risk to any savings you have deposited.

Under the UK’s Financial Services Compensation Scheme (FSCS), consumer deposits are protected up to a cap of £85,000 per person, so all is not necessarily lost. But amounts over that will be a struggle to claw back.

However, the compensation scheme does protect 100% of a set retirement income, such as an annuity, in the event a financial institution fails. It also protects 100% of the value of life insurance policies that have a savings element to them.

Another risk to your savings from a bad Brexit that triggers an economic slowdown is a tax-hungry government. Savings and pensions are pots of gold to the Treasury – and the chancellor may come raiding if revenues slide after Brexit.

It is going to be a bumpy few months. If you have serious concerns, speak to a financial advisor who will be able to guide you through all of the risks and options available to you.

Source: Yahoo Finance UK

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Third of Brits don’t save enough for a month’s rent

A third of Brits do not have enough savings to cover a month’s rent in the event they lost their job, despite many earning above £75,000 a year, research has found.

According to a survey of 2,002 UK adults carried out by Innovative Finance Isa provider Oaksmore, 30 per cent of those surveyed said they could not afford a month’s rent if they lost their job, even though one in 10 was earning more than £75,000 a year.

A mere 38 per cent admitted to having money in a current account, the provider said.

According to the study 55 per cent had never attempted to earn greater interest on their savings by investing in a form of Isa, while 1 in 5 said they were not aware of the earning potential of investing in cash Isas. About a third (28 per cent) said moving money into a cash Isa was not a priority for them.

Reuben Skelton, director at Oaksmore, said: “Sometimes it feels like money leaves the bank account just as soon as it comes in, but it’s so important to get into good saving habits to put a fund aside for emergencies.

“Investing money into schemes with strong returns is a great way of topping up salaries and the interest alone can form the foundations of an excellent emergency fund to help workers stay out of financial difficulty should the find themselves out of a job.”

Calum Bennie, savings specialist at Scottish Friendly, said he believes Brits are scared of investing in anything else other than cash.

He said: “Attitude to risk is a personal thing and ultimately you shouldn’t feel uncomfortable about where you’ve put your money.

“Investing doesn’t have to be scary, or complicated, or only for the wealthy. It’s for everyone.”

Oaksmore offers an Innovative Finance Isa that allows public investors to support heritage projects across the UK.

Ifisas allow savers to invest in FCA-regulated peer-to-peer lending platforms and other alternative investments while using their annual Isa investment allowance to receive interest and capital gains tax free.

Source: FT Adviser