Anyone who expected to be able to live off savings income during retirement has had to deal with endless bad news since the onset of the financial crisis.
Back in 2007 they were able to get an average interest rate of 5.5% on their ISAs, but since then rates have been on a steady downwards slide - and one expert has said they won't recover to pre-slump levels until 2025.
The average ISA rate is now just 1.64% - down from 1.87% this time last year. At the bottom of the tables some returns on savings are truly dismal, with rates of less than 1%.
The downturn decimated savings rates and record low Bank of England rates for the past 71 months haven't helped either. To make matters worse, the government's Funding for Lending scheme made it easier for banks to borrow money from the government, so they didn't need to attract cash from savers and they could drop rates still further. Before the scheme was launched, savers could expect to earn anything up to 3% on their savings, now there's little close to 2% on the instant access market.
When will rates rise?
There had been some talk of a rise in interest rates at some point during this year, to reflect the fact that growth is returning to the economy. The Bank of England Monetary Policy Committee even saw the odd member voting for an immediate rise. However, this month nobody in the committee was looking for a rise, because of the risk that below-target inflation could become entrenched if they're not careful. At this stage, the consensus is that central bank rates won't be rising until at least July or August next year.
Chris Williams, CEO of Wealth Horizon, said in a statement that even when rates do rise - they won't be going anywhere fast, explaining: "Even the punchiest of predictions emerging from economists at the Bank of England have placed the base rate at 1.5 per cent in 2020." In fact, forward guidance from the Bank of England has stated that the 'new normal' is likely to be around 2% or 3% - rather than the 5% or more we saw before the financial crisis.
When rates go up, there's no guarantee that this will be passed on by banks and building societies either. Williams adds: "It is unlikely that this increase will be passed on directly by banks and building societies. As such, it could be closer to 2025 before savers see any real improvements to the interest rates they receive on their cash ISAs."
Of course, it's essential to remember that predicting interest rate rises is hardly an exact business, and that the predictions the Bank of England made in November already differ wildly from the rates it predicted three months earlier. However, if they are right about the 'new normal', then it's going to make life even harder for those who planned to live off the interest on their savings.
What can you do?
Williams would like to see more people considering stocks and shares ISAs as an alternative. He points out that only one in five of all ISAs opened have been for stocks and shares, and that since the 2008/2009 tax season, £217 billion has been placed into cash ISAs. He argues that the fact that the value of so much of this is being eroded after inflation should push people to consider their wider options.
If a cash ISA suits your needs, however, you need to track down the best rate possible. At the moment, for example, National Savings and Investments is offering an instant access cash ISA paying 1.5%. You can choose to tie your money up for longer in return for a better rate, and if you do this, pensioners should consider the pensioner bond - which is paying 2.8% over one year or 4% over three years. In the broader ISA market, the Post Office is offering 2.1% over two years.
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