Why bother saving when your country wants you to spend?
- 11 May 2013
- From the section Business
This week those attempting to save up their money reached a new landmark.
For 50 months in a row, the Bank of England has held interest rates at a record low of 0.5%.
Returns on savings accounts are currently as low as 0.1% after tax.
At the same time inflation, as measured by the consumer price index (CPI), is running at 2.8%.
In other words, why are you bothering to save when the longer you do so, the more you lose?
Theoretically you would be far better off spending, rather than saving.
Indeed the government and the Bank of England would like you to buy a new car, treat yourself to a comfy sofa, or head off to the sun.
But an army of Britons who want care in their old age, a good pension, or even a house perhaps, are resisting with defiance.
Vincent Scheurer is in the vanguard of that resistance movement.
He is a lawyer, and lives with his wife and two young children in south-west London.
He is already saving for the children's university fees. But he is not a happy man.
"We're getting crucified in two different ways," he says.
"The fact that interest rates are so low, means that ultimately our savings don't grow at all."
By using so-called "teaser rates", or introductory offers on savings accounts, he has found it possible to achieve returns of 0.5% at best.
And then there's the problem with inflation.
"It's a kind of double whammy - inflation on the one side, and artificially suppressed interest rates on the other," he says.
Spend it now
Of course, the Bank of England is doing little to help.
Quantitative easing (QE) helps to keep interest rates low. On top of that, the Bank's 2% inflation target now appears to be a little more optional, after the chancellor tweaked the Bank's remit.
Both of which mean that there is little prospect of either inflation coming down, or savings rates going up.
In effect, savers are being told to lump it, because it is spenders that are needed by the economy.
"The government always wants you to go out and spend, to stimulate the economy," says Tom McPhail, of Hargreaves Lansdown.
"So there was always going to be that tension there."
But despite the Bank's spend-it-now incentive plan, Mr Scheurer is determined to stick to his principles.
"They're essentially trying to force me to take my savings out of the bank, and spend it immediately," he says.
"I'd love to spend money now, I'd love to go on holiday, I'd love to get a new car, it would all be great - but we need to prioritise our savings first."
Mr McPhail agrees. "As a nation we're not saving enough," he tells the BBC.
"We need long-term savings into individual savings accounts (ISAs) and pensions."
So if you are one of those determined to save, what on earth can you do?
- First of all consider paying off any expensive debts - store cards and credit cards charge higher interest rates than you can get in a savings account
- Paying off mortgage debt can also be worthwhile, providing there are no large penalties for doing so
- Maximise your tax-free allowances in ISAs - you can invest up to £5,760 in a cash ISA this year, and £11,520 in a stocks-and-shares ISA- remember to use your partner's allowance too
- Keep moving your savings, to take advantage of so-called teaser rates - higher introductory rates that usually expire after six months or a year
- Consider investing in shares - even though some stock markets are now at record highs, share dividends alone can return you between 3% and 4% a year
The outlook for savers is unlikely to get better quickly. Those who study bond yield curves say it could be up to three years before things change.
"We must expect low interest rates and high inflation for several years to come," says Mr McPhail.
But of course both those factors are good for borrowers, if bad for savers.
Perhaps the only practical solution belonged to Shakespeare's Polonius, who said, in Hamlet: "Neither a borrower nor a lender be."
But given Polonius's untimely end, perhaps he knew he wasn't going to need to save up for a pension.
The rest of us, who entertain a longer life expectancy, will always want to put some money away.