Last week the Bank of England (BoE) cut interest rates for the first time since 2009 and expanded the government stimulus package to £70bn, including a new plan to buy corporate bonds. These moves are likely to have a range of consequences, including an affect on the value of your savings and pensions.
The cut in interest rates has made cash even less appealing. According to Tom Stevenson, investment director for personal investing at Fidelity International, investors who had put £15,000 in a savings account 10 years ago would now be almost £10,000 worse off than if they had invested in in the FTSE All-Share index. That amount invested in the index would have grown to £25,323 compared with £15,976 held as cash.
Between August 2015 and August 2016 the average no notice cash individual savings account (Isa) interest rate has fallen from 1.11 per cent to 0.95 per cent according to moneyfacts.co.uk, and rates have been spiralling down since the last interest rate cut in 2009. The average easy access savings account offered interest of 0.94 per cent in March 2009 and now offers just 0.55 per cent, according to Moneyfacts. Meanwhile the average two-year fixed rate bond has fallen from 2.83 per cent to 1.31 per cent over that time.
Many banks have cut their cash Isa interest rates in response to the BoE decision with more expected in the coming weeks. These include HSBC which will cut Isa rates on a number of its accounts from September 2016, in some cases by as much as 0.39 per cent. Santander has cut the rate on its Help to Buy Isa from 2 per cent to 1.5 per cent - more than the quarter point rate cut. A number of building societies have also made cuts.
Between 2010 and 2013 average inflation was higher than cash Isa rates, meaning savers effectively lost money, and many investors will now be wondering whether a cash Isa is really the right place for their savings.
But for savers who need access to their money in the short term, or are saving for a short or medium-term goal, cash Isas might still be more appropriate than a stocks and shares Isa.
The best rates for variable rate cash Isas are typically from newer building societies and challenger banks such as Bank and Clients, which offer higher rates but tend be less flexible than other accounts. Bank and Clients' variable rate Isa cannot be opened online and cash cannot be accessed without 90-days notice. But it pays 1.5 per cent interest on balances of £1,000.
When to move from cash to stocks and shares Unless you need your cash in the very short term it might be better to hold it in a stocks and shares Isa. "If you are putting money away for more than five years you need to consider whether holding it in cash is good value," says Colin Low, chartered financial planner at Kingsfleet Wealth. "If you are saving for two years for a car or something similar, keep it in cash. But if you have a longer-term objective there is little point in cash." Lee Robertson, chartered wealth manager and founder of Investment Quorum, adds: "We would say keep your emergency money in cash but if you have more than beyond three to six months' earnings, I'm not sure I see the point of cash with such awful rates." |
Isa rate cuts 4 August-8 August 2016 (ordered by highest current rate)
| Provider | Account | Old rate | New rate | Difference |
| Leeds BS | 5-Year Fixed Rate Isa | 1.90% | 1.70% | -0.20% |
| Skipton BS | 3-Year Fixed Rate Isa | 1.50% | 1.30% | -0.20% |
| Leeds BS | 1-Year Fixed Rate Isa | 1.25% | 1.15% | -0.10% |
| Skipton BS | 2-Year Fixed Rate Isa | 1.25% | 1.10% | -0.15% |
| Coventry BS | Easy Access Saver | 1.30% | 1.10% | -0.20% |
| Marsden BS | Branch Cash Isa 30 | 1.20% | 1.00% | -0.20% |
| Skipton BS | 1-Year Fixed Rate Isa | 1.15% | 1.00% | -0.15% |
| Marsden BS | Direct Cash Isa 30 | 1.00% | 0.80% | -0.20% |
| Marsden BS | Branch Annual Cash Isa | 1.00% | 0.75% | -0.25% |
| Scottish Widows Bank | E-Cash Isa | 1.00% | 0.60% | -0.40% |
Source: Moneyfacts.co.uk, as at 9.08.16
Best variable cash Isa rates
| Bank | Annual equivalent rate (AER) | Notice/ term | Minimum investment | Notes |
| Al Rayan Bank | 1.55% (expected rate) | 120 day | £250 | Sharia compliant. Islam bars interest so return is an 'expected profit rate' and not guaranteed. |
| Bank and Clients | 1.50% | 90 day | £1,000 | Cannot open online or by phone. |
| Yorkshire bank | 1.50% | 40 day | £15,000 | No transfers in or online account opening. Can open by post, phone or in branch. Balances under £15k receive lower rates |
| Clydesdale Bank | 1.50% | 40 day | £15,000 | No transfers in or online account opening. Can open by post, phone or in branch. Balances under £15k receive lower rates |
A blow for income seekers
The biggest blow from the rate cut will be to income seeking investors and pensioners. You may have to scale down your yield expectations or move up the risk scale to receive the same income level.
Pensioners will suffer on a number of fronts. Annuity prices are underpinned by gilt yields so a fall in yields will hit annuities, which were already dropping following the vote for Brexit. Steven Cameron, pensions director at Aegon says: "The further cut in interest rates means now is probably the worst time ever to be making a retirement decision, with those buying an annuity today locking in to super-low returns for life."
Gilt yields are also used to value defined benefit pension liabilities, which have swollen dramatically since the BoE's interest rate cut. According to consultant, Mercer the accounting deficit for the UK's 350 largest listed companies increased by £10bn over just the five days following 4 August interest rate cut.
Anyone in drawdown and hoping to glean income from their pension also faces a far tougher time when it comes to taking income without excessive risk, so needs to consider whether to re-position.
The cut in rates and new BoE bond-buying package means that bond yields are set to fall further, making equities seem more appealing from an income perspective. "With bond yields also low, and property suffering its own problems, the stock market is the only option for those seeking a decent return, though a long-term view is essential," says Richard Troue, head of investment analysis at Hargreaves Lansdown."Money always flows somewhere and its destination for the foreseeable future should be the stock market - in particular equity income."
Equity income funds offer a way to invest in stocks paying out consistent income and tend to yield between 3 and 4 per cent. They can also offer a more defensive tilt due to their focus on quality companies. "Equity Income investing tends to have a natural defensive bias," says Adrian Lowcock, investment director at Architas. "Companies which pay dividends often have better cash flow and management teams focused on shareholder returns. However investors do need be careful as in 2016 many UK companies have been cutting dividends or paying them out of previous years' profits. Further falls in interest rates will make equity income more attractive."
Mr Lowcock highlights Threadneedle UK Equity Income (GB00B888FR33). He says: "Manager Richard Colwell combines his economic outlook with detailed company analysis to decide where to invest. The portfolio has exposure to defensive companies such as pharmaceuticals and tobacco. He supplements this core portfolio with exposure to more contrarian investments and tends to have a bias towards mid-cap stocks."
Chelsea Financial Services highlights Evenlode Income (GB00B42KJH51) as a fund whose holdings in larger UK stocks could benefit from weaker sterling.
Mr Troue recommends Artemis Income (GB00B2PLJH12), managed by Adrian Frost, who "uses his economic views to select some of the UK's largest, most profitable companies."
Don't forget bonds
However don't shun bonds just because yields are falling. The new stimulus package launched by the BoE is likely to drive up the value of your bond holdings and make corporate bonds in particular a more appealing asset for capital growth. You do not have to take a natural yield from your portfolio and could sell down units to take income instead. That makes bonds likely to appreciate in value a solid choice.
Many investors hold bonds to help diversify their portfolio, rather than just for income, and this remains as important as ever.
"You hold bonds partly because they are less correlated with equities and perform differently in different market cycles," says Mr Low. "So bonds are important for income but play a capital growth role too. And if all you are doing is getting income by losing capital, then that is not a favourable strategy."
Mr Low points to the value of strategic bond funds, which enable managers to move between different areas of fixed income so they can focus on the best ones at the current time.
