Big loss: Saver Alan Marnes can't beat inflation
THE nation’s savers will subsidise mortgage borrowers to the tune of more than £100billion this year.Rock-bottom interest rates have brought a bargain bonanza for borrowers but they have proved a curse for those relying on their savings – particularly pensioners.
Your Money investigates how savers have lost out from record low rates, and offers advice on the best ways to make the most of any cash you have.
Last week’s inflation figures were a fresh blow to savers after the Consumer Price Index leapt from 4.5% to 5.2% in September, while the Retail Price Index hit a 20-year-high of 5.6%.
But while most people have been hit by soaring living costs on the back of rocketing energy bills and rising food prices, this masks the winners and losers from the Bank of England’s decision to slash its base rate to a record low 0.5%.
Experts at Moneyfacts say a basic rate taxpayer would now need to earn 6.5% interest on their savings to keep pace with inflation.
There are no regular savings accounts paying that much, with the average offering a pitiful 1.1%.
But while savers are losing money in real terms, home buyers on variable rate deals are saving a packet. The average mortgage rate – for those who can get a deal, at least – has crashed to just 3.2%.
Yet HSBC research reveals things were very different during previous inflation spikes. When the rate hit 5.9% in 1991, the Bank of England’s base rate was 11.6%. Mortgage borrowers were paying around 11.39% interest, yet savers were still getting 9.7%, on average.
Fast forward to today and mortgage borrowers owe four times more than they did 20 years ago – £1.24trillion compared with £320bn. Yet thanks to tumbling rates they’re paying barely any more in interest – £39.9bn versus £36.4bn in 1991.
The amount Brits have locked away in savings has also soared, up from £360bn in 1991 to £1trillion now. But while investors pocketed £34.6bn in interest 20 years ago, record low rates mean today’s savers will earn just £11.4bn this year.
The difference between what borrowers are paying now and what they would have paid if rates were the same as in 1991 is £102bn. That’s money that savers might have got otherwise.
This raid on savings has hit older people especially, and they’ve been the biggest victims of soaring inflation. It’s because disproportionately more of their income goes on things like energy and food, which have shot up most. And not having a mortgage means many don’t gain from falling home-loan rates.
According to Saga, the cost of living for average 50-to-64-year-olds has leapt 18.5% in the past five years, compared with 14.4% for the population as a whole.
Saga director general Ros Altmann said: “Soaring inflation combined with plunging savings income are both hitting the older generation, who are having to cut their spending.”
Bruno Genovese, head of savings chief at HSBC, said: “We expect inflation to fall next year but interest-rate rises are still some way off.
“Savers must make the best of their situation.” With that in mind, these tips could make your money work harder.
Savers can use the rising cost of living to their advantage by going for an inflation-linked account.
BM Savings, part of the Halifax, has a three-year bond paying 0.25% above the RPI measure of inflation – 5.85% in total – or a five-year bond pays 0.5% above inflation – 6.1% in total. BM also has three and five-year bonds, on the some terms, as part of your ISA tax-free allowance.
The Post Office’s three-year bond pays 0.25% above RPI and a five-year bond 1% above. But with experts predicting inflation has peaked, savers could be caught out when the rate they get drops.
While you’ll get less now, it may be worth opting for a fixed-rate bond, which offers a guaranteed income.
Andrew Hagger, from Moneynet, said: “Consider fixing for a shorter period and you can review the situation later.”
The Post Office Online Bond pays 3.96% (3.16% after tax for a lower rate taxpayer) for two years, or 4.21% (3.36% after tax) for three years. If you’ve not used your ISA allowance, the Post Office’s three-year fixed rate bond pays 4% tax-free.
One silver lining in last week’s inflation announcement was that the tax-free ISA personal allowance will rise from £10,680 to £11,280 next April. The full amount can be invested in a stocks and shares ISA or up to half in a cash ISA.
“Currently, the rate of inflation as measured by the CPI is 5.2%.
“So paying down a loan that charges more than that is a guaranteed inflation-beating return.”
But David Black, of independent infancial research company Defaqto, warned: “Retaining some savings to deal with emergencies is sensible.”
Say you’ve got £10,000 in a savings account and a £100,000 mortgage. You won’t earn interest on the savings but will only pay interest on £90,000 of the mortgage.
As you don’t earn interest, you won’t pay tax so you get more bang for your buck.
Yorkshire Building Society has a five-year fixed rate offset mortgage for buyers with a 25% deposit at 3.69% with a £95 arrangement fee, and 3.49% with a £995 fee.
For those with a 15% deposit, it has a five-year deal at 4.54% with a £95 fee and 4.34% with a £995 fee.
One way of reducing the risk is to invest through a bond fund such as M&G’s inflation-linked corporate bond fund.
This aims to protect your capital and income from inflation by delivering a rate of return that keeps pace with the Consumer Prices Index.
There is another way, which is to invest in shares that will pay attractive dividends. Mr Kuo says: “Dividends are a portion of profits that companies pay to shareholders
“You could invest through a fund such as Invesco Perpetual’s High Income fund, or consider building up your own portfolio.
“If you plan to go down the DIY route, stick to companies that not only have a high dividend yield, but those that can significantly grow their payouts over the long term too.”
Companies use bonds – effectively IOUs – to raise money.
The rates on offer can look attractive but that’s because they’re riskier than putting your money in the bank.
If the company goes bust, you’re not protected by the Financial Services Compensation Scheme. If you’re willing to take the risk, some companies deal directly with savers.
National Grid has just announced details of a 10-year bond, for those with a minimum of £2,000, which pays 1.25% above RPI.
Alternatively, you could go for a corporate bond fund where a manager picks the companies in which to invest. You can get investment grade bond funds, as they are known, paying income of between 4% and 5% a year.
At the other end of the scale are high yield funds where you can earn up to 11%, but with this option, there is much more danger of losing your money.
Since then he has applied for more than 1,300 jobs across the country and had only eight interviews – so far without success.
Yet because he built up around £100,000 of savings while he was working, he has received six months’ dole money and not a penny since.
His plight has been made worse because wife Jenny, also 60, will have to wait until next year to begin collecting her pension after an increase in state retirement age.
Alan, a former production manager, of Southoe, Cambs, said: “We saved the money for our senior years but it is disappearing at an alarming rate.
“I think we’ll have enough to get us through to when I can collect my pension at the age of 65 but after that we’ll be on the breadline.
“I’ve already had to cash in my premium bonds and other savings to meet day-to-day costs.
“These days I’m getting virtually zero per cent on some accounts whereas in the past, with a £100,000 balance, you could expect to earn interest of maybe £7,000 a year.”
But while most people have been hit by soaring living costs on the back of rocketing energy bills and rising food prices, this masks the winners and losers from the Bank of England’s decision to slash its base rate to a record low 0.5%.
Experts at Moneyfacts say a basic rate taxpayer would now need to earn 6.5% interest on their savings to keep pace with inflation.
There are no regular savings accounts paying that much, with the average offering a pitiful 1.1%.
But while savers are losing money in real terms, home buyers on variable rate deals are saving a packet. The average mortgage rate – for those who can get a deal, at least – has crashed to just 3.2%.
Yet HSBC research reveals things were very different during previous inflation spikes. When the rate hit 5.9% in 1991, the Bank of England’s base rate was 11.6%. Mortgage borrowers were paying around 11.39% interest, yet savers were still getting 9.7%, on average.
Fast forward to today and mortgage borrowers owe four times more than they did 20 years ago – £1.24trillion compared with £320bn. Yet thanks to tumbling rates they’re paying barely any more in interest – £39.9bn versus £36.4bn in 1991.
The amount Brits have locked away in savings has also soared, up from £360bn in 1991 to £1trillion now. But while investors pocketed £34.6bn in interest 20 years ago, record low rates mean today’s savers will earn just £11.4bn this year.
The difference between what borrowers are paying now and what they would have paid if rates were the same as in 1991 is £102bn. That’s money that savers might have got otherwise.
This raid on savings has hit older people especially, and they’ve been the biggest victims of soaring inflation. It’s because disproportionately more of their income goes on things like energy and food, which have shot up most. And not having a mortgage means many don’t gain from falling home-loan rates.
According to Saga, the cost of living for average 50-to-64-year-olds has leapt 18.5% in the past five years, compared with 14.4% for the population as a whole.
Saga director general Ros Altmann said: “Soaring inflation combined with plunging savings income are both hitting the older generation, who are having to cut their spending.”
Bruno Genovese, head of savings chief at HSBC, said: “We expect inflation to fall next year but interest-rate rises are still some way off.
“Savers must make the best of their situation.” With that in mind, these tips could make your money work harder.
SAVINGS ACCOUNTS
The bad news is there are no inflation-beating regular savings accounts on the market. But that doesn’t mean you have to put up with the stingy average rates offered by banks and building societies.Savers can use the rising cost of living to their advantage by going for an inflation-linked account.
BM Savings, part of the Halifax, has a three-year bond paying 0.25% above the RPI measure of inflation – 5.85% in total – or a five-year bond pays 0.5% above inflation – 6.1% in total. BM also has three and five-year bonds, on the some terms, as part of your ISA tax-free allowance.
The Post Office’s three-year bond pays 0.25% above RPI and a five-year bond 1% above. But with experts predicting inflation has peaked, savers could be caught out when the rate they get drops.
While you’ll get less now, it may be worth opting for a fixed-rate bond, which offers a guaranteed income.
Andrew Hagger, from Moneynet, said: “Consider fixing for a shorter period and you can review the situation later.”
The Post Office Online Bond pays 3.96% (3.16% after tax for a lower rate taxpayer) for two years, or 4.21% (3.36% after tax) for three years. If you’ve not used your ISA allowance, the Post Office’s three-year fixed rate bond pays 4% tax-free.
One silver lining in last week’s inflation announcement was that the tax-free ISA personal allowance will rise from £10,680 to £11,280 next April. The full amount can be invested in a stocks and shares ISA or up to half in a cash ISA.
CUT YOUR DEBTS
WITH savings rates so low and economic storm clouds gathering, use spare cash to cut debts. David Kuo, of website The Motley Fool, says: “Pay off loans with a higher rate of interest than the rate of inflation because interest charged is the flipside of interest earned.“Currently, the rate of inflation as measured by the CPI is 5.2%.
“So paying down a loan that charges more than that is a guaranteed inflation-beating return.”
But David Black, of independent infancial research company Defaqto, warned: “Retaining some savings to deal with emergencies is sensible.”
OFFSET MORTGAGE
IF you’re buying a property, or are in a position to remortgage, consider an offset home loan. These work by using money from a savings account to cut the mortgage balance on which you pay interest. There are one or two where you can include a current account.Say you’ve got £10,000 in a savings account and a £100,000 mortgage. You won’t earn interest on the savings but will only pay interest on £90,000 of the mortgage.
As you don’t earn interest, you won’t pay tax so you get more bang for your buck.
Yorkshire Building Society has a five-year fixed rate offset mortgage for buyers with a 25% deposit at 3.69% with a £95 arrangement fee, and 3.49% with a £995 fee.
For those with a 15% deposit, it has a five-year deal at 4.54% with a £95 fee and 4.34% with a £995 fee.
CORPORATE BONDS
CORPORATE bonds are more risky than traditional savings accounts because you are effectively lending money to businesses.One way of reducing the risk is to invest through a bond fund such as M&G’s inflation-linked corporate bond fund.
This aims to protect your capital and income from inflation by delivering a rate of return that keeps pace with the Consumer Prices Index.
There is another way, which is to invest in shares that will pay attractive dividends. Mr Kuo says: “Dividends are a portion of profits that companies pay to shareholders
“You could invest through a fund such as Invesco Perpetual’s High Income fund, or consider building up your own portfolio.
“If you plan to go down the DIY route, stick to companies that not only have a high dividend yield, but those that can significantly grow their payouts over the long term too.”
Companies use bonds – effectively IOUs – to raise money.
The rates on offer can look attractive but that’s because they’re riskier than putting your money in the bank.
If the company goes bust, you’re not protected by the Financial Services Compensation Scheme. If you’re willing to take the risk, some companies deal directly with savers.
National Grid has just announced details of a 10-year bond, for those with a minimum of £2,000, which pays 1.25% above RPI.
Alternatively, you could go for a corporate bond fund where a manager picks the companies in which to invest. You can get investment grade bond funds, as they are known, paying income of between 4% and 5% a year.
At the other end of the scale are high yield funds where you can earn up to 11%, but with this option, there is much more danger of losing your money.
£100k I worked hard to save up is running out
ALAN Marnes has been forced to raid his savings since he was made redundant on his 57th birthday three years ago.Since then he has applied for more than 1,300 jobs across the country and had only eight interviews – so far without success.
Yet because he built up around £100,000 of savings while he was working, he has received six months’ dole money and not a penny since.
His plight has been made worse because wife Jenny, also 60, will have to wait until next year to begin collecting her pension after an increase in state retirement age.
Alan, a former production manager, of Southoe, Cambs, said: “We saved the money for our senior years but it is disappearing at an alarming rate.
“I think we’ll have enough to get us through to when I can collect my pension at the age of 65 but after that we’ll be on the breadline.
“I’ve already had to cash in my premium bonds and other savings to meet day-to-day costs.
“These days I’m getting virtually zero per cent on some accounts whereas in the past, with a £100,000 balance, you could expect to earn interest of maybe £7,000 a year.”
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