As inflation continues its downward spiral, savers may be encouraged as more savings accounts now make a real return when taking into account tax and inflation. However, with inflation seemingly under control, the Bank of England is now under less pressure to increase interest rates.
Mark Carney has already suggested that even when the base rate does rise it will remain modest and won’t be increasing to pre-crisis levels. The fact is that the lack of competition in the market has had a bigger impact on savings rates in recent years than the drop in the Bank of England base rate, so focusing on a base rate rise could be a bit of a red herring.
What is important now and always is that savers shop around and move their money to better their returns.
Emma Wall: Hello, and welcome to the Morningstar series, Ask the Expert. Today I have Anna Bowes of savingschampion.co.uk with me to discuss Cash ISAs.
Hello, Anna.
Anna Bowes: Hi.
Wall: So next month, Bank of England base rate has been at 0.5% for five years. We know this has had a great impact on mortgage rates, but what kind of impact does it had on tax savings rates?
Bowes: Well, quite simply it is more than halved savings rates, but I think it's all to do with actually the Bank of England base rate, because what we saw a couple of years ago was the introduction of the Funding for Lending scheme, which gave the market a great deal of cheap cash. The lenders suddenly had a lot of cheap cash to use and that meant that they didn't need to raise funds from savings anymore and that had the most dramatic impact. We saw rates halving really since August 2012 on both, Easy Access and on ISA rates.
Wall: Does this mean that people should just give up on cash? I mean, what can we do?
Bowes: Well, I think most people want to have some of their money in cash, and so there is no real alternative to that. So, the key thing that people need to do is to find the very best rates that they can, and I am afraid once you found them, unless that's in a fixed term account and a fixed rate, you need to keep an eye on them.
So, anything that's variable, the rates are likely to change. It may have a short-term extended bonus, which means that the rate is going to stay high for a while, but will drop or the rates may simply be cut, something that we have seen a lot of even though the base rate hasn't moved for the last five years.
Wall: We have found out that inflation is now 1.9%, which perhaps suggests there are more accounts that will beat inflation offering you that real rate of return. Do people have to lock their money out for a long time to get that help?
Bowes: Well, the very best rates as I said are definitely on the longer-term fixed rates. So, yes, in order to beat inflation, you may really have to think about putting some of your cash into longer term fixed. You then know what you are going to get for that period of time. Now with the information coming in from the inflation report that interest rates – the base rate certainly is likely to remain low and for some time. And even when it starts to rise, it's not going to rise by a great deal.
Then it may make those rates that are out there for longer term a little more attractive, but as I said what has got more impact actually is the competition in the market. And if we don't see that recovering again, it's not really looking like rates are going to be rising in the short term. We are in the middle of the ISA season and yet there's still very competition out there at the moment. We just have to hope that that changes.
Wall: So it's just about being vigilant then?
Bowes: It's really about being vigilant and moving your cash. So, if the rate you're in is no longer competitive, it's really important to find something that's paying a better rate and move that money. And if you haven't used your Cash ISA elsewhere then – so if you haven't used your ISA allowance elsewhere and you have got some money in a savings account, which is you're paying tax on, you may as well just pop it into a tax-free savings account. You can always move it across into other investments later on if you want to.
Wall: Cash is an actively managed asset then?
Bowes: It certainly is. It really forms a part of your portfolio. I mean, you have to think about that and you have to make sure you do the best with your cash as well as your other investments.
Wall: Anna, thank you very much.
Bowes: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
