How Are Low Interest Rates Affecting Savers?
Our NerdWallet survey of UK savers examines how record low interest rates, COVID-19, Brexit and potential negative interest rates could impact how people manage their savings in 2021 and beyond.
Record low interest rates and the prospect of rates going negative has left British savers in a savings conundrum. While almost half of British savers do not have a clear savings strategy, according to our survey, nearly the same amount would not agree to pay fees on their savings if rates drop further.
Building up savings is always a prudent financial decision, but more than a decade of record low interest rates has meant savings no longer attract as high an interest rate as they used to. And with the pandemic and fears over the impact of Brexit in the mix, staying in the savings habit might be harder than ever.
However, since rates fell early in 2020, a majority of savers surveyed have pursued finding a better rate to boost their return. And with the people we surveyed having average savings of over £15,000, a better rate can make a difference.
These findings came from a NerdWallet survey of more than 2,000 savers in the UK to determine how they planned to save money in 2021 and how events such as COVID-19, Brexit and the threat of negative interest rates were impacting their financial plans.
- On average, a UK saver has £15,175 in savings – for the youngest group (those aged 18-34), this figure falls to £8,675, while for the over-55s it jumps to £21,912.
- More than two-fifths (41%) of savers have no idea how much interest their savings are earning.
- Almost half (49%) of savers don’t have a clear savings strategy in place for 2021.
- Over half (52%) of savers have shopped around in the last year to see if they could find a better savings account.
- More than a third (36%) of savers do not know what the introduction of negative interest rates would mean for their savings, yet 47% say they would withdraw money from savings if bank charges were introduced as a result of a negative base rate.
- 38% of savers say they have put their savings goals (such as saving for a house deposit) on hold as a result of COVID-19.
- Over half of UK savers (52%) believe Brexit will have a negative impact on their savings.
- A third (33%) of savers said that in 2021 they would be spending some of their savings with a view to helping UK businesses (and the wider economy) recover from the pandemic.
Savings not depleted
The survey found that, on average, savers surveyed had £15,175 in savings, although this varies across different age groups. In the youngest group (those aged 18-34), this figure fell to just £8,675, while for the over-55s the savings figure jumped to £21,912.
Of those surveyed, men had slightly more set aside in savings (£16,810) than women (£13,665). Retired people had built up the biggest savings pots (£24,416) while there was a slight difference in savings between those working full-time (£14,176) to those working part-time (£15,355). Those out of work had managed to keep an average savings balance of £3,832.
In an era of low interest rates, more than two-fifths of savers surveyed (41%) admitted that they didn’t know how much interest their savings were earning and almost half (49%) didn’t have a clear savings strategy in place for 2021.
The good news is that some people have tried to take control. NerdWallet’s research found that since the start of last year, just over half (52%) of savers surveyed shopped around to see if they could find a better savings rate. The 18-34 year old group were most likely to shop around, with 64% of them researching how to get the best rates.
John Ellmore, NerdWallet Director of Operations, says: “With rates so low it can be easy for people to put looking after their savings at the bottom of their financial priorities. But there is still a range of savings options for savers who want to shop around.”
History of low interest rates in the UK
Interest is a sum charged on the amount of money borrowed, and in the UK, interest rates are based upon the Bank of England’s base rate. It’s hard to believe in this era of low interest rates that there once was a time that double-digit interest rates were the norm (interest rates reached 14.88% in October 1989). For more than a decade now, interest rates have been at record lows, starting with a cut to 0.5% in 2009 during the financial crisis, and then a new low of 0.25% after the Brexit vote in 2016. The base rate then fell to its lowest rate of 0.1% in March 2020 after the pandemic started.
Generally speaking, low interest rates make it cheaper to borrow, thus encouraging spending and investment, but they also mean that savers earn less on their money.
The impact of low interest rates
So what has been the impact of the unprecedented long run of low interest rates on British saving habits? More than a third (38%) of respondents to the NerdWallet survey said they had started saving less since interest rates fell to a record low of 0.1% and, in a possibly related outcome, 23% have started spending more in the same time frame. Not only do lower interest rates tend to put people off saving – as their money earns interest at such a low level – but the financial impact of the COVID-19 pandemic and fears over the effect of Brexit might have made it harder to maintain a regular savings habit.
If interest rates were to fall even lower, into negative territory, then that would be a tipping point for almost half of savers surveyed: 47% said they would withdraw all or part of their money from their savings accounts if bank charges were introduced as a result of interest rates at sub-zero. Men said they would be more inclined to do this (52%) than women (42%). However, more than a third of respondents (36%) were unsure what negative interest rates would mean for their savings.
What do negative interest rates mean?
In May last year, the Bank of England said that the base rate could drop lower than 0.1% to a negative interest rate. This in theory means that you do not pay any interest when you borrow money, but the lender instead credits you interest. However, in practice, this would only apply in some circumstances: some mortgage borrowers for example would likely end up with smaller monthly repayments.
Savers would be the worst affected as they would no longer receive any interest payments on their savings, but it is unlikely that savers will actually have to pay banks to look after their money for them. But the effect of inflation over time would mean their money declines in value as it will have less spending power.
John Ellmore, NerdWallet Director of Operations, says: “The only thing worse than earning low interest on savings is earning none at all and possibly being charged instead. It’s an unsettling thought, and although savers should understand it’s unlikely to come to that, it’s good to be aware of the possibilities and consider how you’ll respond if it does become a reality. While the Bank of England is looking at other options to encourage lending and investing, it hasn’t taken negative interest rates off the table yet.”
As previously mentioned, since the start of last year, just over half (52%) of savers surveyed have shopped around to see if they could find a savings account with a better rate than their existing account. With the Bank of England base rate at an all-time low, many mainstream savings accounts, such as those offered by the High Street banks, give interest rates as low as 0.01%. Other savings accounts offer higher interest rates so it’s worth shopping around, although some require notice of several weeks or even months before you can withdraw your money.
Fixed-rate savings accounts give higher returns but require you to lock your money away for a fixed period, such as one, two, three or five years. Other options include fixed-rate and cash ISAs. If you want to invest to make your money go further and benefit from the potential for higher returns, then you might want to consider a stocks and shares ISA. But be aware, you may get back less than you invest with a stocks and shares ISA.
The impact of COVID-19 on savings
Few people have been immune to the financial impact of the coronavirus pandemic and for many, household income has been hit hard. NerdWallet’s research found that 38% of savers surveyed have put their savings goals – such as building up a deposit for a house – on hold because of COVID-19. However, of those who have built up a savings pot, 33% said that they planned to spend some of those savings this year with a view to helping British businesses, and the wider economy, recover from the pandemic.
John Ellmore, NerdWallet Director of Operations, says: “During a time when many of us wonder what we can do to help the country move forward, our individual efforts to support our favourite businesses can have a collective positive effect. However, it’s important that it doesn’t come at a steep personal cost to our own financial health and security. It’s going to require balance.”
The impact of Brexit on savings
Like the voters’ view on the referendum itself, the verdict from savers on the impact of Britain leaving the European Union is split: 52% of savers surveyed think that Brexit will have a negative impact on their savings and just 25% say that it will have a positive effect.
Relatively speaking, men tended to be more optimistic than women on this issue, with 46% of men saying that the value of their savings would decrease because of Brexit, compared to 58% of women thinking the same. On the other side of the coin, 32% of men said they believed their savings might increase due to Brexit, compared to just 18% of women.
While there could be a short-term impact on the economy as many predict, by far the biggest impact is likely to come from the pandemic, which may make the impact of Brexit harder to gauge.
Savings goals on hold for 18-34 year olds
Those who are aged 18-34, are arguably at the most fluid time of their lives, financially speaking. These two decades are when many people enter full-time employment, find their own accommodation, possibly buy their first homes and generally gain financial independence. COVID-19 may have hit this group hardest of all.
Three-fifths (60%) of this group surveyed have put their long-term savings goals on hold because of the virus, more than any other age group surveyed and in stark contrast to 38% for all savers surveyed. Also, since the base rate fell to 0.1% in March 2020, 45% have been saving less, the highest percentage of any age group. It isn’t just low interest rates and COVID-19 that is worrying them: 57% believe that Brexit will have a negative impact on their savings as well.
Despite these challenges, this group is finding ways to take control of their finances. Nearly two-thirds (64%) have started searching for a new savings account that gives them a better rate of interest than their current one, while 56% plan to invest their savings in a stocks and shares ISA in 2021. Meanwhile, in a sign that they are looking to the long-term, 48% plan to save more money into a pension scheme rather than a traditional savings account this year.
On the other hand, just over half of this youngest group (51%) – compared to 33% for all savers surveyed – plan to spend some or all of their savings in 2021 in a way that will benefit British businesses and help the UK economy in general recover from the pandemic.
John Ellmore, NerdWallet Director of Operations, says: “I hope we all can accomplish both saving and supporting businesses in the year ahead. It shouldn’t have to be one or the other, although much will depend on the government’s financial response to the pandemic and the economic recovery.”
Tips for making your savings work harder
- Confirm where you are: Find out what interest rate you are currently getting on your savings and shop around to see if it is worth switching to another account with a higher interest rate.
- Assess your flexibility: If you are saving for the medium to long-term, consider locking your savings away for one, two, three or five years in a fixed-rate savings account to benefit from higher interest rates.
- Save what you can: If your finances are stretched, even saving a small amount of money each month can reap benefits later on as the compound interest rolls up. Have a look at regular savings accounts, which often give a higher interest rate. Earning the full interest generally requires a minimum deposit each month of the savings window, typically a one-year term.
Disclaimer/methodology: The market research was carried out between 12 and 15th January 2021 among 2,001 UK adults via an online survey by independent market research agency Opinium. Opinium is a member of the Market Research Society (MRS) Company Partner Service, whose code of conduct and quality commitment it strictly adheres to. Its MRS membership means that it adheres to strict guidelines regarding all phases of research, including research design and data collection; communicating with respondents; conducting fieldwork; analysis and reporting; data storage. The data sample of 2,001 UK adults is fully nationally representative. This means the sample is weighted to ONS criteria so that the gender, age, social grade, region and city of the respondents corresponds to the UK population as a whole.
Image source: Getty Images
Sarah Bridge has been writing about business and finance since 2000. She was formerly Deputy Editor, Personal Finance, The Mail on Sunday and was previously the paper's Leisure Correspondent. Read more