By Justin Rourke, chartered senior financial planning manager, Armstrong Watson LLP
The Bank of England raised its base rate again in August pushing the figure up to 1.75 per cent. For the past 13 years the rate has averaged about 0.5 per cent, oscillating between 0.1 per cent and 0.75 per cent.
The ratcheting up of interest rates has started to permeate through to the interest paid on savings, although it has often been loan rates (for example, variable rate mortgages) which have increased earlier and faster. Unfortunately, you cannot assume that your existing savings accounts have benefited from the 1.75 per cent rise in the base rate since last December.
Periods of rising interest rates have traditionally been an opportunity for banks to expand their margins by widening the gap between what they pay depositors and charge borrowers. They now have their first real chance to do so for well over a decade.
Are you missing out on increased rates of interest?
This strategy can be seen most clearly when it comes to accounts that are no longer open to new savers. For instance, National Savings & Investments (NS&I) is not immune: it offers 0.01 per cent* on its Investment Account, while its Direct Saver account and Income Bonds pay 1.2 per cent.*
At a time of economic uncertainty, when you may wish to build up your cash reserves, you need to look beyond the familiar brand names if you are to find a return that beats the Bank of England base rate rather than one that sits well below it.
Contrary to what you might expect, cash ISA rates may be lower than non-ISA rates. NS&I again provide a good example: their Direct ISA pays 0.90 per cent. While an ISA offers freedom from income tax, in practice the personal savings allowance means you can earn £500 interest tax-free if you are a higher rate taxpayer (£1,000 if your top rate of tax is less).
With inflation rising, should you consider investing?
Inflation is now at its highest level for over 30 years. In The Bank of England’s Monetary Policy Committee (MPC) August report, CPI inflation is expected to rise more than forecast in the May Report, from 9.4 per cent in June to just over 13 per cent in 2022. So what does this mean in relation to investments?
When inflation is around two per cent – the Bank of England’s government-given target – it goes virtually unnoticed. Economists reckon some inflation is necessary to keep the wheels of the economy moving and that two per cent is about the right level. Prices still increase, but they do so slowly and are balanced to a degree by other prices falling. At two per cent, the phrase ‘cost of living’ is not automatically followed by the word ‘crisis’.
Inflation is generally bad news for bank deposits. With rising interest rates there remains a significant and growing gap between deposit and inflation rates. We all need to hold some readily accessible funds for an emergency, but if your cash does not keep pace with at least CPI then you may not be able to buy the same goods and services in the future. Capital you don’t need access to in the foreseeable future could therefore be considered for investment. This means investing in other types of assets beyond cash and involves exposing it to a degree of risk. How much risk is very much dependent upon the individual and this aspect needs careful consideration.
Past performance is no guarantee of future performance. The value of investments can fall as well as rise and investors may not get back their original investment.
*details correct as of 05.08.22
- Armstrong Watson Financial Planning and Wealth Management is a Chartered Firm. Choosing to and how to invest is a very personal decision, and our team of independent financial advisers can help guide you through the investment solutions available to you based on your own personal preferences and circumstances. Please contact 0808 144 5575 to discuss how we can help or email help@armstrongwatson.co.uk
