Interest rates at record low for three years

When interest rates were cut to the lowest level on record, the head of the Building Societies Association called it a "kick in the teeth" for savers.

Now, three years on, these same savers may feel they have suffered a full-blown financial assault.

With the Bank rate having remained at 0.5% since 5 March 2009, savers have been offered little in interest on their lump sums for some time.

But what has been bad for savers has been good for borrowers. For many, mortgage rates have been much lower than during previous years.

And then there is the bigger picture. Rates tumbled in late 2008 and early 2009 as the Bank of England sought to revive the economy.

Rates have been kept down since - some say at an artificially low level - in an attempt to prevent the UK sinking into a long-term recession.

At the same time the Bank has expanded the amount of money in the banking system, through a programme known as quantitative easing.

All this has prevented the Bank taking the traditional route of putting rates up to keep control of the rising cost of living, or the inflation rate.

So how has all this affected individual groups, and what is the outlook in the view of the experts?

Savers

It was Adrian Coles, director general of the Building Societies Association (BSA), who said that the dropping Bank rate was a kick in the teeth for savers.

Finance Savers have needed to do their homework to find a way of making their funds work harder for them

He has not changed his mind. In fact, he says that rates were lowered too much. This, he believes, tipped the balance too far in the favour of borrowers and against savers.

Official Bank of England figures illustrate his concern.

In the first week of October 2008, the Bank rate was at 5%. Putting cash into a typical Individual Savings Account (Isa) at that point would have awarded an interest rate of 4.49%. A typical instant access savings account would have offered interest of 2.46%.

Fast forward a few months to March 2009 and rates had plunged, with those same savings products offering 0.96% and 0.15% respectively.

Three years on, and savers garner just 0.61% interest from a typical cash Isa, and 0.2% from a typical instant access account, the Bank's figures show.

Mr Coles says that this has hit two groups of people in particular. The first is pensioners who have a fixed lump sum of life savings. The interest they earn on this is probably less now than it was when they retired.

The second group is young people saving for a deposit to buy their first home. These potential borrowers are not a great attraction for building societies without a stock of savings to lend out in mortgages.

Mr Coles does not expect a rise in the Bank rate until well into next year.

"People will have to grin and bear it," he says.

The Save Our Savers pressure group thinks the situation is unfair, and a concern for wider society.

"Current policy makes it more rational for individuals to be borrowers than savers, despite the fact that it is generally acknowledged that an over-reliance on underpriced debt is responsible for - and is prolonging - the economic crisis," it says.

"Debt problems are having growing undesirable impacts on society beyond the purely monetary."

Borrowers

The last three years have been a bonus for the prudent borrower, says Chris Broome, of Broome Financial Planning.

Independent mortgage broker Lea Karasavvas says low mortgage payments have been a "rare glimmer of light" at a time of economic troubles.

But there are warnings too. Any borrower who has settled into a budget relying on low rates could be in for a shock when rates start to rise again.

Bank of England The Bank of England will reveal its latest position on interest rates and quantitative easing on Thursday

The standard variable rate on the typical mortgage has been less than 5% over the past three years.

For a borrower with a fixed two-year deal with a loan-to-value level of 90%, the typical rate has hovered just above or below 6%, according to Bank of England figures.

But the real winners have been those able to offer a larger deposit, as banks look to lend to relatively risk-free mortgage holders.

The typical two-year fixed rate deal dropped from 4.35% three years ago, to less than 3% in September. At the end of January 2012, it stood at 3.27%, the Bank's figures show.

Mr Broome says these low rates have given homeowners some extra disposable income to clear some of their other, more expensive debts.

Yet, rates will rise again and people need to prepare for this. When that happens, and by how much rates rise, depends largely on what happens in the eurozone, he says.

Mr Karasavvas, of Prolific Mortgage Finance, says: "Mortgage holders on standard variable rates need to understand that the years ahead will not be as easy as the three years behind us.

"Rates can only go up and people need to factor this into their financial plans."

Retirees

While savers and borrowers are able to make relatively short-term decisions on the back of interest rate changes, many people approaching retirement do not have the same luxury.

These are people who have saved into a pension all their lives and now - primarily as a result of the quantitative easing programme - they find that the income they can buy with their pension pot has plummeted.

This retirement income is known as an annuity.

Elderly woman Financial decision making has been particularly tough for those approaching retirement

The drop in value is clear by looking at the benchmark annuity, which can be bought with a pension pot of £100,000 by a couple - when the man is aged 65 and the woman aged 60.

At the start of March 2009, they could buy a retirement income of £6,236 a year. At the start of February 2012, this had fallen to an annual income of £5,245. So people buying this annuity three years ago would be nearly £1,000 a year better off than those buying now.

"Pensioners are paying the price because of the banking crisis," says annuities expert Billy Burrows, of the Better Retirement Group.

"People approaching retirement are between a rock and a hard place. Annuity rates are low but they are also fearful of investing [their savings] in the stock market during uncertain times."

The answer for many, he suggests, is to diversify, instead of committing all their money to an annuity which they can buy only once.

But he predicts that even if, as expected, there is a rise in interest rates and yields on government bonds - the key measure that is generally mirrored by annuity rates - this might not necessarily all feed through to rising annuity rates.

Part of the reason is that insurance companies will no longer be able to take gender, and therefore the different age expectancy of men and women, into consideration when deciding what to offer.

image showing Bank of England interest rates, 1694-2011

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