Retiree/At Retirement: Interest Rates

Posted by siteadmin on Tuesday 22nd of March 2016.

Interest Rates: Seven years of half a per cent with no end in sight

When the Bank of England base rate was cut to 0.5% on 5 March 2009, nobody anticipated that it would remain unchanged for the following seven years. Even now, the latest (February) Bank of England Inflation Report says that the money markets are not anticipating a rate rise until the end of this year with base rate failing to reach 1% until 2019. The recent cuts in interest rates to below zero in the Eurozone and Japan and a gloomier economic outlook have prompted the governor of the Bank of England, Mark Carney, to suggest the next move in UK rates could be downwards, although he has ruled out negative rates.

The main UK banks seem to have long since given up competing for deposits in this low interest rate environment. The best instant access rates for new accounts are now around 1.5%, leaving National Savings & Investments Income Bonds surprisingly competitive at 1.25% (1.26% AER). A similar picture emerges for cash ISAs, where again National Savings & Investments offers a competitive a 1.25% instant access interest rate.

If low interest rates are a concern to you:

  • Make sure you take maximum advantage of your new personal savings allowance.
  • Maximise you cash ISAs, which pay interest tax free.
  • Regularly check the interest rate on all your deposit accounts. Even though Bank of England base rate has been set in stone, deposits rates have not. It is especially important to watch accounts with bonus rates – once the bonus goes they can look very unattractive. Do not simply wait for the next statement:  if you are only earning 0.1%, you need to know now.
  • Be wary of tying your money up in a fixed term deposit for five or more years simply to achieve an interest rate close to 3%. A lot can happen in five years, but another half decade of 0.5% base rates looks very unlikely.
  • Consider investing in UK equity income funds, where yields of 4% and more are widely available. You will lose capital security, but your initial income would be usefully higher and the new dividend allowance lets you receive £5,000 of dividends before paying any dividend tax, regardless of your personal tax rate.

Year End Planning: If you have not yet arranged an ISA or invested up to the 2015/16 maximum, think about doing so by 5 April. If you are unsure where to invest given current volatile conditions, you can always leave your money on deposit, even in a stocks and shares ISA. Just don’t expect it to earn much interest. After 5 April, think about making your 2016/17 contribution early to maximise potential tax savings.