Five years of low interest rates have 'ravaged' savings
It has been five years since interest rates were cut and cash savings have been ravaged, says Alex Hoctor-Duncan, head of European Retail at BlackRock.
It was half a decade ago that worldwide central banks agreed to co-ordinate an interest cut, that would eventually lead to the Bank of England cutting its base rate to a record low of 0.5% in March 2009.
Hoctor-Duncan says many savers keep their money in cash as a "safety blanket" because of ongoing market uncertainty, but the combination of high inflation and low interest rates is having a "corrosive impact".
Figures from BlackRock show that savings of £1,000 five years ago today have a real value of just £846.
Savings of £5,000 have been eroded to £4,232, while a nest egg of £200,000 five years ago has seen more than £30,000 wiped off its value.
"Investors looking to grow their wealth in the long term need to look beyond cash and reassess their attitudes towards risk," says Duncan.
Peter Chadborn, director of adviser firm Plan Money, points out that many people are not comfortable with equity investing, however. "Equities are often associated with carrying risk, but so is keeping money in the bank, as that money is being eroded by inflation."
Chadborn says individuals concerned about the impact of inflation on their finances and unable to find a savings rate that can beat it should consider investing in equities through a stocks and shares Isa. Drip-feeding money into an investment, rather than putting in a lump sum, can also help to reduce risk.
"It is important to make yourself very educated when you are investing. Understand the importance of diversification, and the risk profile and objectives of any investment you are considering rather than just looking at the performance," he adds.
This article was written for our sister website Money Observer
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 interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
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.
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).