Banks’ old tricks on cash savings

Ed Monk
Ed Monk
Fidelity Personal Investing10 August 2018

An almost-forgotten argument has flared up again following the Bank of England’s decision to raise interest rates.

I’m afraid to say that I’m old enough to remember reporting on financial affairs back before the time of the crisis and the decade of emergency low interest rates that we are only now emerging from. Back then, a regular pattern was in place in which the Bank would raise rates, High Street banks would immediately pass on that raise for their mortgage borrower customers but would be far less eager to raise their cash rates paid to savers by the same amount.

Cue lots of grumbling from us in the personal finance press about the seeming double-standard. Then the financial crisis hit and in 2009 the Bank cut interest rates to 0.5% and the grounds for the argument was removed for almost ten years.

Now it’s back, with The Times today reporting that only one of 100 banks and building societies it asked have passed on last week’s interest rate rise in full. Meanwhile, mortgage rate rises have been almost immediate. This difference is extremely lucrative for banks - The Times said that Royal Bank of Scotland expects the rate rise to hand it a £300m boost by 2020.

Based on a quick look at best buy rates this morning, there is only a tiny number of savings accounts that come close to matching inflation, which is currently 2.4% according to the Consumer Price Index measure. The best rate inside an ISA, where returns are completely free of tax, is 2.3% from Shawbrook Bank and requires savers tie their money up for five years. A fixed-rate savings bond from SecureTrust Bank, which sits outside an ISA and requires the same 5-year commitment, would pay 2.69%.

Such low rates is a problem for the millions of people, particularly those in retirement, who use savings to help with living costs, and the reason that many have looked to the potentially higher returns available from the stock market which requires taking the risk of loss. The tardiness of banks to pass on higher rates now that they seem to at last be rising in earnest means this situation is unlikely to change soon.

The danger of seeing your savings eroded by inflation, and of missing out on potentially higher investment returns, was underlined in recent work by the City watchdog, the Financial Conduct Authority, which has been monitoring how recent changes to pension rules are affecting retirees.

It found a worrying trend of more people accessing their pension savings flexibly, as 2015 rule changes now allow much more widely, and putting this money immediately into poorly paying cash savings accounts instead of leaving their money invested for growth to support their retirement for many decades.

The regulator even put a figure on this damage, estimating that consumers could secure an income that is 37% higher if they chose to invest their pensions pot in a mix of assets rather than holding it all in cash. It’s hard to judge these people harshly - they are taking what they believe to be a prudent course to protect their hard-won saving - yet their reluctance to invest is likely to mean they will miss out.

Many of these people will not be experienced investors and will look upon the risk of capital markets with deep caution. Here, a few well-worn, but still valid, investing principles can be reassuring.

Firstly, investing over a long time line means you can ignore short-term volatility and price falls. If you don’t need to sell when prices fall, you don’t realise your loss and can give prices a chance to recover and go on to make gains in the future.

Second, investing in mainstream markets and in companies with a track record of rewarding shareholders with dividends means you are not relying only on share price gains to make a return. Dividends - maybe accessed through equity income funds - can give a more stable return.

Thirdly, you don’t have to necessarily make winning investment decisions yourself to benefit. Passive investing, where a fund holds the whole market of companies in proportion to their size, means you should closely match the return of the whole market without any extra risk of picking the wrong fund, while products such as the Fidelity Select 50 Balanced fund, utilise a professional manager to build a portfolio of active funds to offer the potential of a market beating return without you having to monitor holdings or make changes, albeit for an extra cost.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment for ISAs depends on individual circumstances and all tax rules may change in the future. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.