What Does The New 0.1% Rate Mean For Savers?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.
The week commencing on March the 9th 2020 has been an eventful one. On the 11th the new Chancellor released his debut Budget to tackle the COVID-19 pandemic, and beforehand the Bank of England (BoE) announced it was slashing interest rates from half a percentage point, from 0.75% to 0.1%, in an attempt to buttress the economy and make it easier for banks to lend to businesses.
Here at Castlegate, our financial advisers in Grantham, Lincoln and Nottingham have compiled a short update on how this latter development affects savers. We offer this guide to inform and inspire your thinking. If you would like to discuss your own financial plan with us please get in touch to arrange a no-obligation financial consultation, at our expense:
The 0.1% Rate and Savers
For many years now, interest rates have been far from the 6% returns you might hope to earn from a regular savings account in the early 2000s. With the Governor’s latest announcement to reduce interest rates even further, savers are unlikely to feel enthusiastic. However, they might take some encouragement from the fact that the reduction is likely to be a temporary measure.
Cash investments still have their place in a portfolio; perhaps acting as an emergency financial buffer, or a high-liquid asset which can be committed quickly elsewhere if required. However, it might be worth consulting a financial adviser if you are sitting on large cash savings, and want these to work harder for you to build long-term wealth. Remember, within this interest rate environment, cash savings are, in fact, likely to lose a lot of value over the years due to inflation.
The New Rate & Pensions
Fortunately, with regards to the equites in your pension savings, these are not directly affected by the BoE’s new base rate. However, your portfolio might be affected by the Government’s bond market reaction to the updated rate. Bonds are often used to provide buoyancy to a pension fund, especially during times of market volatility (as we are experiencing now, in the wake of the market’s reactions to COVID-19). Banks might take between three days to three months to start integrating the Bank’s interest rate decision into their financial products. So, now might be a good time to speak to your financial adviser about whether now might be a good time to find some good bond deals, before mass cuts start appearing across the banking sector.
For those approaching retirement and wondering about taking out an annuity, it might also be a good idea to speak to an adviser sooner rather than later. Remember, both final salary pensions and annuities are underpinned by interest earned on government bonds (gilts), and poor yields are likely to result in lower annuity rates offered by insurance companies in the coming months. Of course, every person’s financial goals and situation are different, but in the present economic environment it might be worth speaking to your financial adviser about whether it is wise to use your pension savings to buy tranches of annuity, spreading the price at which you purchase a guaranteed lifetime retirement income.
One important update from this week’s Budget is the new annual allowance taper threshold, coming into effect from the 6th April 2020. At the time of writing (2019-20), your £40,000 annual allowance for pension contributions is reduced by £1, for every £2 you earn over £150,000 (reducing to £10,000 at the most). Under the new rules, however, the threshold in 2020-21 will be raised by £90,000, meaning that this taper will not start reducing your annual allowance until you make at least £210,000 in adjusted earnings.
The New Rate & Homeowners
Here at Castlegate, our financial advisers in the Midlands do not directly work on mortgages, but recognise these often form an integral part of a financial plan. Inevitably, many homeowners will be considering whether now might be a good time to remortgage, lowering the repayments they make each month.
This decision will need to be taken on a case-by-case basis, depending on your individual goals and needs. Whether or not your existing payments change due to the new base rate depends heavily on your lender, and the type of mortgage you have. Tracker mortgages which follow the BoE base rate, for instance, might see a reduction but those on a variable rate might not see any benefit. If you do find that your monthly payments go down, however, then be recommend using this as an opportunity to consider how the extra cash could reinforce weak areas in your financial plan (e.g. increasing your emergency buffer).
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: