It hasn't been an easy ride for savers in recent years, but it could be about to get tougher after a senior official at the Bank of England proposed that interest rates are cut and pushed into negative territory.
Paul Tucker, the Deputy Governor of the Bank of England who mooted the idea last week to MPs on the Treasury Select Committee, warned the radical move would be "extraordinary", and hopes the constraints to setting negative interest rates would be considered.
Although the notion is aimed at banks to encourage them to lend more, it could see the paltry rates on savings accounts drop even further. But hard-pressed savers have already had to grapple with record low interest rates of 0.5 per cent, a level that has been in place for four years as of next week.
"A base rate cut, especially one that takes it into the negative, will clearly see more providers cutting the rates on more accounts, leaving savers unable to earn anywhere close to inflation," says Anna Bowes, a director of Savings Champion.
"For those who are dependent on their savings to supplement their income, a move like this could be disastrous and leave them unable to recover, even if rates rise again in the future, as they could have to eat into their capital to make ends meet," she adds. "It could also tempt savers to take greater investment risks in the hope of securing higher income."
The aim of imposing negative interest rates is to charge banks to store their cash with the Bank of England, making it less attractive for them to do so and more attractive for them to lend it out to housebuyers and businesses.
"At the moment, there's a huge build-up of deposits, so the reserve balances of banks – the money they have left over – they deposit with the Bank of England every day," says Jim Leaviss, a bond fund manager at M&G. "At the moment, banks are effectively earning interest of 0.5 per cent for doing this. If there's a penalty to not lending, then maybe that would stimulate economic growth."
It's not just the spectre of negative interest rates haunting savers. The introduction of the Funding for Lending Scheme, which provides billions of pounds to banks and building societies on preferential terms if they lend the money to businesses and individuals, has seen savings rates plummet.
"You could get more than 3.2 per cent on easy access accounts last year," says Ms Bowes. "But rates have come down on best buys, and they are now at 2 per cent."
There is also concern that banks could start adding a charge for current accounts, says Darius McDermott, the managing director of Chelsea Financial Services. "Most cash accounts are already lower than inflation, effectively losing people money in real terms," he says. "Savers are again being punished whereas spenders are being rewarded – and who got us into this mess in the first place?"
Negative rates wouldn't be bad news for everyone. "The winners would be those who have their mortgage rate linked directly to the base rate through tracker deals," says David Hollingworth of London and Country Mortgages. "While savers fear the worst, mortgage borrowers are hopeful. The Funding for Lending scheme, for example, has made mortgage rates cheaper. There could be a more competitive mortgage market, which would see rates come down further. "
Remember, too, that some tracker mortgage deals have floors, meaning the rate wouldn't reduce below a certain level or follow into negative territory.
Mr McDermott says it is worth putting some money into bonds or equities. "Bond prices may well rise on the back of any such action, and both bond and equities should make you more money longer term, although obviously this means people taking on more risk," he says.
There is a danger, though, of taking higher levels of risk. "Retail bonds are offering around 6 per cent – they look similar to accounts , offering fixed interest, over a fixed term, as long as the company doesn't go bust," Ms Bowes says. "But your money is at risk, as there is no Financial Services Compensation Scheme protection."
If your only source of income is from a building society deposit, returns have already been crushed, says Mark Holman, a bond fund manager at TwentyFour Asset Management. "As a result, many people have gone to corporate bonds. It's a consequence of lower rates – to get a reasonable return, people will have to take more risk."
The move to turn rates negative may kick-start bank lending and ultimately boost the economy, but savers would be dealt another major blow. With historically low interest rates already entrenched and providers still reducing rates, savers are only being pushed to take more risk with their money.
Emma Dunkley is a reporter at citywire.co.ukReuse content