RISE AND FALL

How savers can weather the drop in interest rates and rise in inflation

Since the onset of the financial crisis ten years ago, savers, we are told, have been the big victims. Interest rates have been slashed to just 0.25 per cent. Returns from bank and building society deposit accounts have fallen to derisory levels. According to investment broker Hargreaves Lansdown, the average rate on instant access accounts has tumbled from 3.3 per cent to just 0.4 per cent. A saver who put £1,000 in an instant account in July 2007 will have earned just £107 in interest, but worse, when inflation is factored in, that £1,000 is worth just £878. With inflation now rising close to three per cent, taking the loss of spending power value over the past ten years to some 25 per cent, who but a mug would want to save anything? Is it not a tragedy and a cause for hand wringing? The plight is captured in the collapse of t he savings ratio – the amount of money households have available to save as a percentage of their total disposable income. This has fallen to just 1.7 per cent, t he lowest quarterly saving ratio since the series began in the first quarter of 1963. The all-time high for this ratio is not lost in the faraway mists of the Harold Macmillan era: it hit 15.5 percent in the second quarter of 1993. What a descent since then. And over the past decade of emergency low interest rates, who could possibly dispute that savers have suffered a vicious concoction of dwindling interest rates and rising inflation?

And yet, for millions of savers, the worst of times has also been the best of times. Since 2007, despite recession, three general elections, two divisive referendums and now a hung parliament, many are finding that their nesteggs have enjoyed a golden era of gains, well above the average for most previous ten-year periods.

For there are many different types and styles of ‘saving’. And we would not have needed to alight on some faraway, exotic frontier market to enjoy an appreciable after-inflation rise in the value of our pensions and retirement plans.

Savers must be made accountable

Many savers, sad to say, have proved to be their own worst enemy. Rather than taking action to spread their spare cash over different asset classes, they have chosen to settle, not just for derisory returns from fixed interest accounts, but accounts that pay nothing whatever.

Over the past 10 years, the amount of money languishing in non-interest-bearing accounts has shot up eight-fold from £23 billion in 2007 to £179 billion today.

Whatever the reasons – plain uncertainty, fear of commitment, simple indecision, financial inertia or simply the need to keep some money ready for unexpected bills and emergencies – that’s a serious sum of money that savers could have put to better use.

Putting even a small portion of this spare cash aside to invest in a stock market fund would have helped mitigate the pain. If savers had invested some of this in the FTSE All Share Index close to its high point in 2007 – before the near 50 per cent market slide triggered by the banking crisis – they would have enjoyed a 22 per cent gain on the value of their investment.

Laith Khalaf, senior analyst at Hargreaves Lansdown, calculates that the sum of £1,000 invested in a UK stock market fund in July

of that year would on average now be worth £1,666, or £1,323 when adjusted for inflation.

For investors who held their nerve in the wake of the UK’s referendum vote for Brexit, the average UK ‘all companies’ fund has risen by more than 28 per cent over the past year and a typical UK smaller companies fund is up by almost 38 per cent over the same period.

Richard Stone, chief executive of The Share Centre, readily admits that investors have ‘probably’ been forced to take on more risky investments. But, he adds, ‘if you have a pot of savings and you are earning 0.2 per cent in the bank, if that, and someone says put it in a FTSE All Share tracker paying a 3-4 per cent yield, then why wouldn’t you?’

Of course, many would prefer not to take the risk of investing in the stock market. And indeed, for the past ten years the mainstream advice for those nearing retirement has been to give shares a wide berth and invest in safe, fixed interest investments. The reality, however, has been that for those approaching retirement, retaining some investment in shares would have been the better choice.

Even investors in the UK gilt market would have enjoyed one of the best decades in modern times for this asset class. Across the range of easy-to-access UK gilt and bond funds, total returns of more than 100 per cent over this period are commonplace. The long-dated gilt fund managed by Edinburgh-based Baillie Gifford has achieved a total return of 135 per cent over the past ten years, while the Standard Life Investments UK Gilt Fund sports a ten-year total return of 73.7 per cent. Many UK households have come to regard the value of their home as their biggest – and most reliable – savings ‘pot’. And here, too, this form of savings has not disappointed. The price of an average home in the UK has risen from around £180,000 in 2007 to £220,000 this year. Now that ‘average’ house price is a very crude ready reckoner, and subject to wide variation depending on type of house, geographical area, local demand and amenities. But prices in most areas have more than kept pace with inflation. There is no doubt that, for the ultra-cautious savers who have stuck with low interest-bearing bank and building society accounts for perhaps no other reasons than ready access and convenience, this has been a tough decade. For them a rise in Bank of England interest rates cannot come soon enough. But even if the emergency low rate of 0.25 per cent is raised later this year, there is no certainty that banks will quickly follow suit with corresponding rises in deposit rates. Indeed, t hey will be anxious to keep borrowing rates as low as they can for business borrowers and households alike given all the uncertainties ahead. The lesson is that savers will need to take a more active role to manage their cash as efficiently and effectively as possible, but that if they do so the rewards are there.