From pensions to savings, we examine what negative rates could mean for investors.
The Bank of England Monetary Policy Committee (MPC) has voted unanimously to hold the base rate at 0.1 per cent, but set the ball rolling for banks and building societies to prepare themselves for the possibility of negative interest rates “at any point after six months”.
In the minutes to the latest meeting of the MPC, it said: “While the committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future. The MPC therefore agreed to request that the PRA [Prudential Regulation Authority] should engage with PRA-regulated firms to ensure they commence preparations in order to be ready to implement a negative Bank Rate at any point after six months.”
Myron Jobson, Personal Finance Campaigner, interactive investor, said: “It is clear from the Bank’s tone that preparedness does not necessarily mean negative rates are on the cards, nevertheless, even the preparations will be enough to worry savers.
“News that the base rate will remain at 0.1% for the time being offers no reprieve to savers, who have seen rates cut back to the bare bone since the onset of the pandemic - from 0.75% to 0.25%, then to just 0.1% - all in the space of 8 days in March.
“However, it could be a case of ‘never say never’ when it comes to the base rate falling to zero or going negative as part of attempts to rejuvenate the UK economy from the Covid malaise.
“What this would actually look like for savers remains to be seen, but the prospect of being charged to deposit cash into a savings account is likely to have huge ramifications on the nation’s savings habits. Many might resort to taking the cash out of savings accounts and let’s hope people don’t resort to shoving money under the mattress.
“In the current low interest rate environment, many people turned to investments to make their money work harder for them. Long term this is encouraging – taking too little risk can mean that you won’t achieve your goals, just as taking too much risk can be harmful to your long-term wealth.”
On savings and annuities for retirees:
Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “The mere mention of preparations for negative interest rates will cause further dismay to an already beleaguered generation of retired savers today.
“Although the bank made clear that preparations were not a signal that negative rates are on the cards and things could still go either way, the message to banks to ‘get ready’ will be sending shivers down the spines of millions of retired people around the UK.
“Lower rates affect older people in particular, because they have amassed savings throughout life, some of this through pensions, and now depend on this money to provide them with income, as they are no longer working. If interest rates are lower than inflation, their hard-earned money, built up over decades, is eroding in value. If their cash is worth less, it buys less and the problem for older people is that they are unable to earn through work to keep their income topped up and maintain living standards.
“Pensioners have been suffering below inflation real returns on their savings for years. The idea of potentially being charged for keeping their money safe in a savings account could see some to consider withdrawing cash from accounts and choosing to stuff it under the mattress.
“Those choosing to receive retirement income in the form of an annuity would be hit by negative rates. The amount of guaranteed annual income that an annuity will pay out falls as interest rates fall, so you get less income from your pension pot.
“But no one should panic on the back of this news today. There are other ways to try and preserve the value of your cash. Some retired people might want to consider cautiously investing for income instead and taking advantage of pension freedoms to make withdrawals only when needed to avoid holding too much cash. Those considering accessing their pensions soon should avoid unnecessarily taking their lump sum and putting it all straight into cash, as it may stand more chance of beating inflation if it remains invested.”
Dzmitry Lipski, Head of Funds Research, interactive investor, said: “There are some funds that could be appropriate for investors worried about negative interest rates.
For global equities, two choices would be Baillie Gifford Responsible Global Equity Income Fund and Artemis Global Growth Fund. For index-linked government bonds, there is Capital Gearing (LSE:CGT) Trust. An infrastructure choice would be Legg Mason IF ClearBridge Global Infrastructure Income, while other options would be to buy commodities and reduce exposure to banks.”
Notes to editors
- Bank of England Report can be found here (page 12, point 72 for negative rates) https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/february-2021
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