Guide To Decreasing Interest Rates_50138

Expert views on how declining interest rates are affecting savers

Record low interest rates could equal massive losses for savers this year. As The Bank of England offers the lowest lending rate in history, people are starting to wonder, what now?

The stock market crash pales into insignificance compared to the crash in interest rates, says independent financial advisor Philip Pearson of P&P Invest. This will directly affect income for savers.

Now and then

Over the past five years, interest rates have been on a rollercoaster. They rose to their peak last year, when the best current accounts were offering a return of 7%. This has now fallen to around 2.75%, says Philip.

Currently the best equivalent account offers 3.5% interest. So if you put ?,000 away, that s ?5 over the year, not including tax. Five years ago the best account averaged 5% interest a total of ?0 a year, minus tax.

The future

Some analysts suggest there may be a further series of interest cuts on the way, with rates not set to rise until mid 2010.

Philip agrees, saying: It s likely that interest rates will weaken during this year should the Bank of England move to further stimulate the economy. This will only lead to even lower rates for savers, with many accounts providing a return of less than 1%. This low interest rate environment may continue over a prolonged period should the world remain in recession.

Protect your interests

It s a good idea to take a pro-active approach towards your savings and seek advice in order to protect them against inflation over the long term.

Dennis Hall, of Yellowtail Financial Planning, adds that decreasing interest rates will have a significant impact on some of the most vulnerable members of society. Anyone who relies on interest, typically the retired, will have already seen a reduction in their income levels. This could lead people to adopt savings and investment strategies which put them at higher levels of risk.

People should ensure any money put into a bank offering higher interest rates, is covered by the Financial Services Compensation Scheme (FSCS). This covers you up to ?0,000, if the bank goes bust.

There s still hope

Borrowers who are not on fixed-rate mortgages, however, are now reaping the rewards of lower repayments. And that extra cash can be used to build up your savings. Because of this, Dennis reports there has actually been a slight upswing in the amount of savings within UK households.

Five years ago, UK households were saving 4% of their income, he says. Then, at the height of the property bubble, when people were borrowing heavily, that fell to nearly minus 2%. We were spending more than we earned. But by the beginning of 2009, the savings ratio had returned to positive territory and was approaching 2%.

So there is a slight silver lining after all.