Preparing for Negative Interest Rates

The Bank of England’s Monetary Policy Committee has alerted UK Banks to the need for preparing for negative interest rates within the next six months. Whilst they stressed this doesn’t necessarily mean that negative rates are going to be put in place, they need Banks to be ready if the change does in fact happen.

However, the Bank of England have recently confirmed that for now, the base rate will be kept at 0.1%, which is a record low.

What does this mean for savers?

For UK savers, unfortunately, this means much of the same. Interest rates will remain at an all-time low, meaning your savings may not be keeping pace with inflation and the value of what you can buy will be eroded over time.

If interest rates drop below 0%, there is the chance that you will receive nothing in return for holding your savings with a provider, or, although unlikely, being charged for using a savings account. We could also see more Banks charging for current accounts or increasing their borrowing rates for those with mortgages, loans and credit cards just to keep savings rates from falling below 0%.

What can you do?

If you have a large sum in a savings account, which is achieving little more than a 0% interest rate, there are other options you can consider and we have listed a few below:

  1. Look at a fixed term savings account that may offer a better interest rate. These could be for 6 months up to 5 years, or longer. You should however be aware that you will not have ‘easy access’ to your money and may be charged if you need to access the funds early. In addition, if fixing for a longer period of time the rate may become uncompetitive should interest rates subsequently rise for their current lows.
  2. Consider gifting. If you’ve been thinking about the potential for inheritance tax being charged on your estate, you could gift some of your funds to loved ones. Of course, there are rules around this that must be followed, and tax consequences that could arise. If you’re thinking about gifting, it would be best to seek professional advice.
  3. You could invest. If you do not need instant access to your funds and are happy to invest for a potentially better return than that being offered by your savings account, investing your funds into a Stocks & Shares Individual Savings Account (ISA) or a Pension to name a few, could be a suitable option for you. This could give you the potential for improved returns over the longer terms as well as potentially providing you with taxation advantages. You should remember though that your capital would be at risk. If you’re considering investing for the medium to long term (5-10 years or longer) again, it would be best to seek professional advice.

How can we help?

If you’re concerned about the possibility of negative interest rates, and how it may affect your savings, please get in touch and we’ll be happy to help.

India Johnston CII Cert (FS)