Bank of England
PSG Wealth Management Ltd

What are the prospects for cash savers after the interest rate decision by the Bank of England?

Following the Bank of England’s decision to keep the base rate unchanged, Paul Gilsenan, Principal of Paul Gilsenan Wealth Management – a Partner Practice of St. James’s Place Wealth Management – takes a look at savers’ prospects.

Base case

After the UK clocked its worst quarterly growth rate in five years¹, it was little wonder the Bank of England this week left rates unchanged at 0.5%.

Just a few weeks before, markets had priced in a 90% likelihood of a hike²; but a round of poor economic data, struggles on the high street, lower spending on credit cards and falling inflation seems to have put paid to those hopes.

With wage cost pressures building, it’s widely expected that the Monetary Policy Committee will not delay much longer. For now though, cash savers have been offered no relief. What’s more, the likely speed and extent of any rate rises means they may continue to be disappointed for some time to come. Current market forecasts are for interest rates to reach just shy of 1.25% in three years’ time³; still a long way below pre-financial crisis levels.

In 2007, £100,000 deposited in an average account with three months’ notice would have generated interest of £6,000 over the calendar year (i.e. from 1 January 2007 to 31 December 2007). In the 12 months to March this year, the same amount held in a similar notice account would have provided interest of just £740 – a fall of over 87%.⁴

It’s a sobering story, but one that cash savers have had to come to terms with in the years following the financial crisis. And yet, still, UK savers’ preference for the perceived safety of cash remains as firm as ever. Over £1.6 trillion is held in UK retail bank and building society accounts.⁵

The fall in inflation to 2.5% last month means that, of the 1,779 savings accounts available, 19 are at last paying a rate that beats it. That includes four of the 399 Cash ISAs currently available.⁶ But those statistics show that there is still a lot of money sitting in cash and failing to achieve the basic objective of maintaining its spending power.

Funnel vision

There has been a continuing decline in demand for fixed-rate accounts so far in 2018, as savers have proved reluctant to lock their money away ahead of the anticipated rise in interest rates. February saw an outflow of £939 million from term deposit accounts, and analysis suggests that savers have funnelled some of that cash into variable rate and Cash ISA accounts.⁷

That trend adds to evidence that Cash ISA accounts continue to be used as a home for short-term cash, with the result that savers are forgoing the long-term return potential presented by their ISA allowance.

Research conducted last year by Royal London concluded that, over the previous decade, Cash ISA savers missed out on £100 billion in returns by using cash as a long-term investment strategy. Furthermore, it’s estimated that inflation has wiped off the equivalent of £26 billion from the purchasing power of Cash ISAs over the same period.⁸

The average no-notice Cash ISA currently pays 0.80%, which equates to a return of -1.7% after inflation. What’s more, all variable Cash ISA rates remain below the level they were when the base rate was last at 0.50%; before the cut in August 2016 that followed the Brexit vote.⁹ That paints a potentially bleak picture for savers hopeful that savings rates will respond quickly to an eventual rise in the base rate.

Yet despite the low returns on offer, Bank of England figures revealed that Cash ISA inflows in February were the highest in two years at £1.2 billion.¹⁰ The worry is that in the rush to beat the recent tax year-end deadline, or in making early use of this year’s ISA allowance, savers are again at risk of not maximising the potential for long-term, tax-efficient income and growth.

Paul Gilsenan Wealth Management is a partner practice of St. James’s Place Wealth Management. The firm specialises in providing high quality personal advice on wealth management to clients looking to build, protect or preserve their wealth.

The value of an ISA with St. James’s Place will be directly linked to the performance of the underlying funds selected and may fall as well as rise. You may get back less than you invested.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may be subject to changes in legislation in the future. ¹ Office for National Statistics, April 2018 ² , May 2018 ³ Bank of England, Inflation Report, February 2018 ⁴ J.P. Morgan Asset Management, Guide to the Markets, March 2018 ⁵ ⁶ ⁷ ⁹ ¹⁰ Moneyfacts, UK Savings Trends, April 2018 ⁸ Royal London, The Curse of Cash, February 2017

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