Is the pain over for savers as interest rates rise?

By Liam Brooke on Friday 8 December 2017

OpinionAlternative Lending

Lendy's Co-founder Liam Brooke argues savers need a 'Plan B' as inflation continues to erode capital.

Lendy's Co-founder Liam Brooke argues savers need a 'Plan B' as inflation continues to erode capital.

The first interest rate rise for a decade last month brought some early Christmas cheer to savers as the Bank of England increased its base rate by a quarter of a percentage point. After ten years of seeing their savings pots eroded dramatically, hopes were raised that this might herald the start of an upward trend, and that savers would soon see some of their value restored. But is the pain really over yet for savers?

Our analysis suggests unfortunately not. In fact, UK savers could lose as much as £26.5bn over the next year – despite the recent interest rate rise – as inflation erodes capital in low-interest savings accounts. What’s particularly concerning is that the situation has actually worsened significantly: this is more than six times higher than the £4.1bn savers were losing per year through inflation just two years ago.

Why? The key reason is that meagre returns are failing to compensate for rising inflation. The average interest rate on zero and low-interest bank accounts is now just 0.77%, including allowing for a 0.25% increase in line with the base rate (assuming banks even pass this on in full - which is not necessarily a given). This is still lower than the average of 0.9% two years ago.

Savers hold significant sums in poorly performing bank accounts and ISAs: some £1.3 trillion in total, almost £190 billion of which is held in bank accounts that generate no interest whatsoever. Overall these accounts earn just £10 billion in interest – and this modest amount is dwarfed by the sums savers are losing to inflation: some £37 billion at the current 2.8% CPI inflation rate. Contrast this with the inflation rate at the end of 2015 which was just 1.24% and it’s clear that savers are actually facing a double whammy.

What can savers do to maintain and grow the value of their capital? In our view, this on-going situation highlights the importance of creating a diversified, well-balanced portfolio, to offset savings erosion. This could include considering allocating at least a portion of savings to high-yielding products, such as crowd investments available through P2P platforms.

Clearly, there are caveats. P2P investments are in a different league to savings – with a very different risk/return profile. But even done on a small scale, this could act as a buffer against inflation eating away at savings, provide all-important diversification and help drive returns. For example, we offer returns of up to 12% on a diverse portfolio of asset-backed, low loan-to-value property loans.

Savers who have been biding their time waiting for rate rises to finally materialise will be extremely frustrated to find that they are still losing out – and to an even greater degree than in previous years! Doing nothing is an increasingly costly option, so looking at alternative ways to retain and grow the value of their capital and beat inflation is vital. Ironically, now more than ever it’s clear that savers need a Plan B to ease the pain.

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