Those hoping that 2021 would bring for some respite from the financial pressures of 2021 will have been left bitterly disappointed.
Indeed, the coronavirus pandemic is continuing to place immeasurable pressure on the UK economy. Between July and September 2020 alone, 314,000 redundancies were reported. What’s more, Government spending increased by £280 billion last year, whilst public borrowing is thought to be the highest in peacetime history.
The Government and the Bank of England (BoE) tried to offset the economic damage of the pandemic by bringing interest rates down to historic lows of 0.1% in March last year. However, there are concerns that rates are still not low enough to restimulate the economy. Consequently, the BoE is contemplating bringing rates into negative territory; officials have gone as far as to issue a letter, urging UK banks to prepare themselves for the prospect.
Consideration of negative rates is not unwarranted. After all, it will encourage banks to lend more, which will in turn, fuel consumer spending and economic growth. However, it is unlikely that savers will view the policy with such optimism.
The consequences of negative interest rates
Negative interest rates make the prospect of lending more attractive to commercial banks. However, they have the exact opposite effect on savings.
Put simply, negative rates make it more expensive for commercial banks to keep customers’ money in savings accounts. So, if introduced, they could potentially prompt banks to impose charges on clients to keep hold of their money.
That said, due to the economic shockwaves this would cause, it is unlikely that banks will actually impose “savers fees”. But that does not mean savers will come out of things unscathed. If rates fall below zero, they will drive down the value of people’s savings; this will certainly be the case in real terms, given that the UK’s inflation rate is currently sitting just above 0.5%.
So, is there anything savers can do to protect their money?
Investigate alternative accounts
It is vital that savers don’t panic and make any rash decisions, which could cause irreversible damage to their finances. After all, there are savings accounts available which offer comparatively generous interest rates.
Indeed, some fixed rate savings accounts offer as much as 1.25%, whilst certain instant access savings accounts offer up to 0.6%. The key to finding these offerings is conducting thorough research.
Comparison websites are a great place to start with. They save users time and hassle by searching the market for various accounts available, and present their findings in a clear, jargon-free table. All savers need to do is select an account that best suits their needs.
For those looking for a low-risk alternative to traditional savings accounts, investing in premium bonds could be a worthy consideration.
Premium bonds can be bought for £1 each. The minimum amount one can purchase in one go is £25; the maximum is £50,000. The bond holder does not receive interest on their investment. Instead, they are entered into a monthly prize draw, where they have the opportunity to win a tax-free lump sum ranging from £25 to £1 million. What’s more, the initial investment is 100% protected, so even if savers don’t win a prize, they will never lose money.
However, the odds of winning a prize are remarkably low. Indeed, it is estimated there is just a 34,500-to-1 chance of winning a cash prize of any size with every £1 bond purchased. So, even though premium bond investments offer a fun alternative to traditional savings accounts, they are perhaps not suited to those looking to make substantial gains on their savings.
Stocks and shares ISAs
For people who are willing to take on a bit more risk, stocks and shares ISAs could prove to be a good match.
As the name suggests, these are tax efficient accounts which allow savers to invest their money in various stocks and shares – they can choose the investments themselves or leave the decision to their ISA provider.
If investments are successful, stocks and shares ISAs offer a great opportunity for savers to make strong returns on their savings. However, there is also potential for the value of people’s savings to drop, if investments do not perform as well as expected. With this in mind, savers should carefully consider their risk appetite before committing to this strategy.
Negative interest rates may seem intimidating, but it is important for savers to remember that they are not wedded to their existing savings account. Provided that they take the time to carefully research their various options, Britons are sure to find a financial strategy that suits their needs and nurtures their savings pot.
John Ellmore is Director for NerdWallet UK. NerdWallet is on a mission to provide clarity for all of life’s financial decisions. As an independent financial comparison website, NerdWallet provides consumers and businesses with useful tools and insights so they can make smart money moves. From choosing a bank account or breakdown cover to buying a house, NerdWallet is there to help individuals make financial decisions with confidence. Users have free access to our comparison tables and expert content, to help them stay on top of their finances and save time and money, giving them the freedom to do more. For more information, visit NerdWallet.com/uk/.