Clare Francis: Is there any point in saving? With interest rates at record lows some people think not. Recent research from moneysupermarket.com has revealed that 24% of people have no money in savings whatsoever but despite the low returns currently available savings is a habit well worth getting into.
I’m here with Kevin Mountford, who is head of banking at moneysupermarket.com, to talk about why and to ask what if anything the Government and banks and building societies should be doing to encourage us to be saving more.
Q1: So Kevin, 24% of people have no money in savings at all that seems quite a high number to me. Are you surprised by it?
Kevin Mountford: Yes, definitely a worry I think, for two reasons. One, we’re clearly getting into a situation where cash is king – certainly if you look at some of the initiatives around mortgages etc. – it’s all about building up a deposit. The other thing is medium/long term we need to protect our futures and we’re only going to do that by putting money away.
Q2: But with interest rates so low, with base rate at 0.5% and a lot of savings accounts paying less then that I guess in some ways it’s not surprising that people don’t see much point in saving at the moment. But there is a big difference isn't there, between the base rate and the accounts paying less then that and the leading accounts, so it is still worth putting money away?
KM: Yes, I mean the gap between, not only the worst paying accounts but the average paying accounts, and the best paying accounts is maybe as wide as it’s been for the last 12 months. So if you again put things into context, we can forget the dizzy heights that we saw in 2008, and 6%-7% rates.
You look at bank base rate at 0.5% now you’ve got the likes of easy access paying around about 3% for market-leading [accounts]. We’re right in the middle of the peak ISA season, so we’ve got up until April 5th for this years allowance - £3,600 - you’ve got rates at 3%-3.5%. So for a taxpayer, that’s equivalent to 4%-5%, so still a good return, and if anyone is in the fortunate position that they can lock some money away, between one and two years you’ve got 3.75% up to 4.1% with ICICI for a two-year bond, so there’s a massive difference, so I would say as opposed to just burying our heads in the sand and thinking it’s not worth it, there’s more incentive now than ever to actually start switching your savings accounts.
Q3: And you mentioned the Isa allowance, obviously the tax year ends next week – a week on Sunday - so it is well worth using your cash Isa if you haven’t already done so isn’t it, because your returns are tax free?
KM: Yes, very much so, and you’ve got two types – you’ve got your stocks and shares ISA’s, which gives you a big allowance but clearly there’s a degree of risk, but for those that are not prepared to take the risk, or may be are looking for a more shorter-term payback, then certainly cash options are worth looking at.
Q4: The recent interest rate cuts have obviously had a big impact on savers and a lot of people are really struggling now because it’s harder to earn a decent return on your money, pensioners in particular. The Isa allowance is obviously good because it gives you £3,600 tax free, but should the Government be going doing more to try and encourage us to save more?
KM: Yes, in a one word answer! Again there’s a couple of elements to consider. First of all, the banks need retail deposits - so deposits from people in the high street. They’re desperate for them, and in the past the rates have been artificially inflated. They’ve now come back in line with bank base rate, but there’s still as I say attractive rates compared to bank base rate.
But I think what’s happened now is the banks have realised that they’ve been looking after the interests of the borrowers, mortgage customers, partly because there’s been a lot of political pressure. But that pressure is now starting to swing the other way and there’s six, seven times more savers than there are borrowers. So they have to think about these customers or else people will look for alternatives, and that may be investment into stocks and shares possibly, who knows it could even be into property again as the market bottoms out, medium / long-term that might work for them. So the banks can’t afford for people to take their money out of their savings, so that’s one element.
In terms of the Government, it’s somewhat ironic that the pressure from the Government of late is for people to use any spare money by spending it in the high street, getting the tills ringing, and that was one way of giving the economy a boost. However, up until recent times, the Government have been preaching that we need to save for medium and long-term. We’ve got to look after our own futures especially if you see some of the negative press around pension pots etc, so the Government definitely need to play their part in this.
Q5: And what do you think that they should do? Is it a case of increasing the Isa allowance or is it getting rid of tax on all savings, what should they do?
KM: Well, I guess if I was chancellor for the day then I would take the latter, I would remove tax on interest that savings accrue by virtue of the fact that you’ve generally paid it at source anyway. We need to be encouraging people to save and also that will support the economy, because recovery out of this recession is not going to be credit driven, it’s going to be cash driven, so that’s a critical element.
I’m guessing that the pockets are not deep enough for the Government to do that, so a compromise would be an increase in ISA allowances, but again let’s not mess around. We’ve got £3,600 - lets look at maybe £7,500 or even £10,000. Lets give people every reason to save some money.
Q6: The Chancellor has said that we are likely to hear something for savers in the budget in April, but I guess in the meantime the message then for is savers to not bury their heads in the sand, but to seek out the best deals possible?
Yes, it’s still worth spending some time and looking around at what options there are out there, but I guarantee that most people will earn a little bit more by just putting some time aside to look around at what’s available.
Q7: And with inflation and RPI at zero at least you don’t have to worry that inflation is eating into your savings anymore?
KM: Correct, and I guess for certain individuals that have got a little bit more money in their pockets, and again I appreciate there’s a lot of uncertainty, but if you want a disciplined approach to saving, and you want to make a monthly contribution – and again there’s the likes of regular savers that can start from around £20-£25 a month – so really there’s no excuse. If there’s available cash, there are products out there that will allow you to save.
CF: Great, thanks Kevin.
KM: Thank you.