£2,700: the cost of savers’ ‘lost decade’
Interest rates have been below inflation for much of the post-crisis period – at huge cost to those who stuck to cash. By Laura Miller
On Monday it will be 10 years since ministers felt forced to partnationalise Britain’s collapsing banks and rescue the financial system at an initial cost to taxpayers of £400bn. The Bank of England cut the official interest rate six times over the next few months to keep the economy moving.
Collateral damage from those actions has hit pensioners’ incomes hard. Before Oct 8 2008, savers could expect a 5pc return on their cash in an average savings account. And because inflation was so low – at between 1pc and 2.3pc from 2000 to 2008 – savers enjoyed a real return on cash for almost no risk.
Thousands spooked by volatile stock markets during the crisis sought refuge in cash accounts. But many never left, creating a “lost decade” as cash returns fell so low that money in the bank actually cost you – and the loss is probably much more than you think.
With inflation averaging 2.7pc since 2008, savers would have lost £2,684 for every £10,000 left in cash, Bank of England data shows.
This assumes no interest payments at all. Calculations by investment platform BondMason account for a small amount of interest over the period, but this makes barely any difference and £1,920 is still lost. The firm’s chief executive, Stephen Findlay, said: “People underestimate how inflation erodes their savings.”
Research conducted by his firm found that one in 10 British adults with substantial savings did not realise that inflation had any effect on the value of their money.
Mr Findlay said: “We found that 15pc of people are seeking to add to cash in the bank, the one strategy certain to have lost you money in the past decade and likely to do so in the future.”
To paint a true picture of what savers have lost, you need to look at what their money could have earned elsewhere.
Investors who put £10,000 into fixed-term bonds in October 2008 now have £11,434 after inflation, based on a return of 3.5pc a year. In a simple “tracker” fund that mirrors the FTSE All Share index they would have made £3,384 in real terms (see graph, right).
Billions of pounds are languishing in accounts that pay nothing. When the Financial Conduct Authority, the City watchdog, investigated the savings market in 2015, it found that 93pc of adults had a cash savings account, with balances totalling £700bn.
Around half of that is in easy-access accounts, on which banks generally offer low rates because your money can come and go, and they have plenty.
According to Moneyfacts, a data firm, the best easy-access account today is online only with RCI Bank and pays 1.3pc. Inflation today is 2.4pc, meaning in reality savers are losing 1.1pc.
We have been warned. As he left the Bank of England committee that sets interest rates in August, Ian McCafferty said Britain should get used to rates well below the pre-2008 average of 5pc for another 20 years at least.
So what should savers do? Darren Cooke of Red Circle Financial Planning, an advice firm, recommended holding an emergency cash fund of at least six months’ expenditure but said the rest of your capital “should be invested in a welldiversified global portfolio”. He said: “Have some money in riskier stock
The collapse of the American investment bank Lehman Brothers in 2008 sparked the beginning of the financial crisis