On Thursday 4th August 2016, the Bank of England unanimously voted to cut interest rates to a new historic low of 0.25%, following seven years at the previous low of 0.5%. So, what are the options for British savers looking for better returns for their money?
Low interest rates have been the norm for many years now, ever since the Bank of England dramatically reduced the base rate (which other banks use as a benchmark) during the financial crisis.
For many younger savers who have opened their first bank accounts in the time since the crash, pitiful returns of 1% or 2% are normal. They have no memory of the heady days before the recession when it was possible to earn up to 10% interest on your savings. However, interest rates at record lows have mixed consequences.
Low interest rates are good news for people with mortgages and other debt, who will see lower payments on their debt and could leave them with more disposable income. But it’s bad news for savers – a cut in the Bank of England base rate is usually followed by cuts to interest rates on savings accounts, so the money you may have in a savings account will likely be earning you less. It’s also common to see rates on cash ISAs cut too.
Many more savers of all ages are moving money out of their savings accounts, not to spend it, but to seek out a more rewarding home for their cash.
What’s the alternative?
Despite the seemingly endless stream of bad news for savers, there are decent returns out there for people who know where to look. Pursuing higher returns on your cash savings can mean that you take higher risks, so make sure you consider all the facts carefully before moving your money.
Stocks and shares ISA
If you are comfortable with the reality of market volatility – the idea that your investments can go down as well as up -, investing your money in stocks and shares could potentially offer better returns. By taking a long term view, you will be able to guard against short term rises and falls in the market and look to overall returns over five or 10 years.
Here at Nutmeg, we invest in exchange-traded funds, which hold investment assets – like stocks and bonds – and are widely traded on many stock exchanges. They usually track an index, like the FTSE 100 or the Dow Jones.
Over 20 million savers in the UK hold premium bonds, which cost £1 each and enter you into a weekly cash prize draw. Premium bonds are suitable for savers who have £100 or more to invest, want a risk-free option for their money and want to be in with the chance of winning a £1 million jackpot. All prizes are tax free and around 98% of the prizes are worth £25. But it’s important to remember that premium bonds are a lottery, so they’re not suitable for people that want regular income, are looking for guaranteed returns or are concerned about inflation eroding their savings.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek financial advice.