£2,700: the cost of savers’ ‘lost decade’

The Daily Telegraph - Your Money - - MONEY -

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

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