There’s little doubt that, as things stand, inflation will continue to hit everyone with cost-of-living increases across the board. There has been much written about the struggles of those on benefits – and the strikes either ongoing (railway workers) or threatened (nurses, and other public service workers) show that many want to see their wages rise at least in line with inflation. So, what of those on low, fixed state or private pensions but who also depend on cash savings as a financial cushion?
Savings erosion and profit and loss
At least there is some comfort in the capping of duty on alcoholic drinks to those who enjoy a glass or two of stress relief. But is our income from our personal savings likely to increase or decrease? We may try to make sensible predictions as we cope with the recent increases of Bank Base Rate with more to come, according to general economic sentiments or predictions – 2.25% – the highest rate in 14 years and maybe peaking at 6% if analysts are to be believed. But, as usual, nobody knows anything. Least of all the Government, the Bank of England and many economists, as well as “expert” analysts.
Inflation hovers at just over 9% so a savings account with £10,000 is worth in real terms around £9,100 today.
The Base Rate has increased from 1% in early 2021 to 2.25% today (as of October 2022).
A brief shop around three major providers of deposit accounts is quite a shock. I am not including ISAs or fixed bonds but looking at deposits with instant access as these are more likely to be necessary to those facing sudden large increases in outgoings such as tracker mortgages, utilities, insurance etc and therefore need ready “cash” to meet their inflation-hit costs.
Here are some internet site examples:
Skipton Building Society – Easy Access Saver Issue 1, “Withdrawals permitted” – 1.40% gross pa/AER variable
Barclays Everyday Saver – “Anytime, withdraw if you need to” – 0.15% – AER/gross per year variable
Yorkshire Building Society – Internet Saver Plus Issue 12 “Unlimited withdrawals” – 1.8% gross p.a./AER variable.
All correct at the time of writing – 6th October 2022
Woe betides anyone slipping into overdraft
Take Barclays Bank as an example. “If you use an arranged overdraft of £1,200, the annual rate of interest that we will charge you is 35.0% (variable),35.0% APR Representative (variable).” Note that the rate payable is equal to a non-arranged overdraft, the only difference being that an arrangement fee would be payable on an arranged facility, something which defies logic. Of course, there are many prospective lenders who may offer better deals but their small print on lending and repayment costs (such as penalties for early redemption or late repayments need to be checked carefully).
There are too many to list here but some time spent “googling” rather “gurgling” (with some alarm and even disgust) could be well spent.
Interest on loans
Actual loans are less expensive but if they are not fixed rates, the variations will be upwards only for the foreseeable future with potential Base Rate increases.
As to profit/loss, that means financial institutions taking a very large margin on loans where interest is calculated as a percentage above the Bank of England Base Rate, profit, and those with cash deposits getting increasingly less for their hard-earned savings, loss, not only in tiny interest earnings (which, by the way, count as taxable income), but face the reality of inflation diminishing the value of the pound in your pocket
Interest on short-term savings not going up
The fact is that banks are very slow to raise interest payments to savers. We approached UK Finance, the organisation representing almost all of the UK’s banks and building societies to try and find an answer to the question “why?” in relation to the time lag for savers. There was no response.
Interest rates not getting fed through
Speaking on BBC Breakfast TV in February 2022, Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: “Well there are an awful lot of people with savings after the pandemic and the bad news is that unfortunately the interest rates just aren’t getting fed through.
“The last time we had a rate rise it actually only increased easy access accounts, which only hold about 60 percent of our savings.
“They only actually went up by 0.01 percentage points which is a really, tiny fractional amount.”
She added: “Your savings rates aren’t going up but they might go up if we get more and more rates over the rest of the year.” Sorry Sarah. It didn’t happen for the vast majority of savers.
Any more ideas where to put your cash?
Gold and other precious elements such as platinum or lithium have often been promoted for those willing to “play” the market. (As indeed has the FTSER, which as we are constantly reminded, “can go down as well as up”). Racier still is oil but that, as an investable commodity is highly volatile dropping by some 35% in the last year but now on the increase again with major oil producers such as Saudi Arabia and Russia deciding to limit output with little or no notice which has an immediate effect on barrel prices. However, bear in mind that according to “green” ethics, putting your money into fossil fuels is a no-no.
So, there is no easy solution except perhaps to consider this: Legislation compelling banks and other depositories to raise interest paid out immediately after a Base Rate adjustment, at exactly the same time they pass on the interest hike to borrowers.
Which politician or even Chancellor of the Exchequer will dare to be so bold? Best not to hold one’s breath for that one.