Pension freedoms drag down savings rates

pot as a lump sum. An unintended consequence has been that some savers have moved large amounts into cash.

This could be driven by fears that their pension will lose value or that the economic fallout of Brexit will lead to them needing quick access to their money. It could also be driven by apathy or a lack of investment know-how.

A record amount was taken out of pensions between April and June this year, when 336,000 people withdrew £2.8bn, according to the Bank of England. This eclipsed the previous record by almost 25pc, when 264,000 people withdrew £2.3bn in the same period of 2018.

Another consequence of the trend has been to keep savings rates low. Banks typically entice customers to deposit cash with them – money they need so they can lend it out for profit – by offering competitive interest rates. But if savers are queuing up to give them piles of cash regardless, banks have no incentive to offer attractive deals.

Rachel Springall of Moneyfacts, a data provider, said: “There is nothing at the moment making providers want to launch deals with better rates.”

Lacklustre rates penalise savers of all ages. The average easy-access account pays 0.64pc, according to Moneyfacts, while the best deals, from Marcus and Virgin Money, pay 1.5pc.

With inflation at 2.1pc, any money held in readily accessible cash is losing money in real terms.

The low rates are a double whammy for pensioners, however, as money held in cash earns very little compared with the investment returns they could have earned had they left the money in their pension.

The problem could worsen before it improves. The influx of freed-up pension money into savings accounts could prompt banks to go one step further and reduce their savings rates.

If banks attract more money than they need – to fund mortgages and other loans – they can stem the tide by watering down or shutting their deals to nudge savers into going elsewhere. For instance, Nottingham Building Society launched an easy-access account paying 1.55pc last year, the best on the market. But the deal was so popular that the lender withdrew it after just two days.

Ms Springall said: “If banks are too high up the best-buy tables they could find they are getting too much cash and may need to actually cut rates. If they get too much money in, it affects the day-to-day saver.”

Pensioners worried about downturns in the stock market should refrain from siphoning too much money off into savings, according to Darren Cooke of Red Circle Financial Planning. “Leave it in the markets and stick with it,” he said. “Markets come with volatility, there will be downs and there will be ups.”

The flow of pension cash has exacerbated an environment where rates are already low and starting to fall as lenders expect the Bank of England to cut its Bank Rate in October. The interest paid to savers – and charged on mortgages – is almost always based on this central rate.

Banks are also being less generous with their interest because of worries that their profits will be hit by an impending global recession.

There are now no one-year bonds that beat inflation and only one two-year bond, paying 2.12pc from FCMB Bank. Isa customers will need to lock their cash away for five years, with a 2.1pc deal from Metro Bank, to match inflation.