The Bank of England announced last week another interest rate cut to 1.5% - the lowest rate in the Bank’s 314 year history. Market experts are predicting a further rate fall to 0% and unfortunately the situation looks unlikely to improve in the foreseeable future.
For savers this is not good news!
For savings accounts where the rate of interest is variable, the rate is likely to move as the base rate decreases. However, if a savings account has a fixed rate, then it will not be directly affected. Savers need to act now to protect their income and purchasing power of their capital.
Emergency fund
Cash held on deposit is guaranteed by the Financial Services compensation Scheme (up to £50,000). It is a good idea to have an emergency fund of instant access cash – for those in steady employment retain at least three to six months’ salary on deposit; for those in retirement 25% of their portfolio would seem practical.
If you already have this safety net in place and are prepared to forgo the guarantees in exchange for returns that will see your capital sustaining its purchasing power or providing an income, there are alternatives. Below are some options for savers to help protect returns.
Options
If you are seeking a better investment income you could consider:
- fixed rate deposit accounts
- savings accounts with a variable rate of interest with a Bank of England guarantee
- transferring your Cash ISA to a Stocks and shares ISA
- corporate bonds
- equity income funds
- gilts.
However, it is important to note that options iii), iv), v) and vi) carry risk, so you could get back less than you originally invested. In exchange for this risk there is the potential for significantly better returns. Once transferred you cannot transfer back into a Cash ISA and income from Stocks and Shares is paid net rather than gross and cannot be reclaimed by the fund manager.
Seek advice
Before you proceed, do give CFM a ring for individual advice. Whilst this gives you a brief overview of the current savings landscape, it should not be read as a recommendation as it does not take into account your individual circumstances.