Four years of lowest ever base rate
Today marks four years since the Bank of England cut the base rate to the record low of 0.5%.
As it stands, interest rates look set to remain as they are until 2017 – according to Citi – with some experts even floating the idea of a negative base rate to encourage banks to lend rather than effectively paying the Bank to hoard their capital.
With the base rate so low and the rate of inflation outstripping its 2% target, there will inevitably be winners and losers. So, who are they?
Mortgage holders, especially those on tracker deals which rise and fall with changes to the base rate – have benefited. Analysis by HSBC suggests those who took out tracker rather fixed deals in 2007 before the base rate was cut to 0.5% could have saved nearly £9,500 over the past five years, with an average difference between rates of 1.46%.
David Hollingworth, mortgage expert at London & Country Mortgages, said: "Those that have won out the most will be those that bagged a low tracker rate and consequently saw their mortgage rate plummet.
"Even now, mortgage borrowers stand to benefit from the record low in base rate as mortgage rates have tumbled. Fixed rates have hit the lowest rates ever, although the keenest rates remain on offer to those with large deposits."
Savers, on the other hand, have not been so lucky, watching their pots shrink in real terms as interest rates stagnate.
Philip Pearson, an independent financial adviser and partner at P&P Invest, said: "The real losers with interest rates at their lowest for 300 years are savers as inflation has continued to soar above the Bank of England's targets.
"There is no expectation inflation will meet the target of 2% and savers will now face a real devaluation of their money."
Pensioners have also been hit by a double whammy of falling annuity rates and the EU gender directive, which means annuity rates can no longer differentiate between men and women.
This means men, who traditionally receive better rates as they are not expected to live as long as women, have had their income cut.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.