Savers squeezed out by low interest rates

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THEY pledged to get Britain saving again. In reality they’ve achieved quite the opposite, punishing prudence and removing incentives to save.

If more proof were needed that the UK savings culture has suffered under the coalition government, we had it last week when it was revealed that the amount of money being saved into Isas has fallen for the first time.

People are turning their backs on savings accounts not because they don’t want to put money aside, but because a combination of inflation and low interest rates has made it all but impossible to secure real returns on cash.

You might assume that instead many people have turned to stocks and shares Isas. Not so, according to the Investment Management Association. It has reported that sales of equity Isas plunged from £2.2 billion in 2011-12 to just £1.1bn in the most recent tax year, despite a late flurry as markets sustained their new year rally.

When it comes to cash savings, there’s no doubt that the squeeze on household finances – low wage inflation, rising prices – is having an impact. Countless surveys, including the recent Protection Report from Scottish Widows, found that while more people are saving, they’re struggling to keep putting the same amount of money away.

So there is an appetite for saving, as there is for reducing debts and trimming household spending. But efforts to save, whether for a rainy day, for a specific purpose or for retirement, are being undermined not only by a lack of spare cash but by a government with no interest in promoting saving.

Savers have borne the brunt of a threadbare economic policy that now hangs on keeping interest rates low. Two other government/Bank of England policies have compounded the misery for savers: quantitative easing (QE) and the Funding for Lending Scheme (FLS). The latter is being extended, while it seems certain that we’ll see further QE over the summer, despite the absence of evidence that it has produced the desired results.

Savings rates have dropped by 40 per cent since the FLS launched last summer, and they weren’t exactly eye-catching beforehand. Banks don’t need savers if they can get cheap finance elsewhere, and the FLS has given them that.

The government harangues Labour about the borrowing purge that allegedly got us into this mess, while doing everything it can to get people borrowing more: QE, the FLS and, most recently, the Help to Buy mortgage scheme being the notable examples.

With so little incentive to save, we can expect the amount of money in cash Isas to continue falling. But while cash savers are feeling the pain now, the damage to our savings culture will be felt for years to come.

King’s abdication

SAVERS reserve special scorn for Sir Mervyn King, the departing Bank of England governor. King delivered his final inflation report last week, before handing over to Mark Carney in July.

As has become traditional, it was all doom and gloom from the perspective of those who depend on their cash savings. King warned that inflation will remain above 2 per cent for at least another three years and is likely to peak at 3.2 per cent later this year.

Under King, the Bank has turned the screw on pensioners too, with one of the implications of QE being a dramatic fall in pension incomes.

Few people will be sorry to see King leave Threadneedle Street. However, the bad news is that, judging by his successor’s public comments about the impact of low interest rates on savings, King may seem sympathetic in comparison.