Pensions - Articles - Will turning interest rates negative prompt right reaction


Prompted by the pandemic, the Bank of England cut the base rate to 0.1% and has held it there since 19 March 2020. With the UK once again in lockdown, and the cost of the Government’s support measures ever higher, there’s a growing likelihood that we could see the Bank of England move the base rate into negative territory. Most recently, one of the Bank of England’s policymakers* is reported as arguing this could be a ‘crucial tool’ to shore up the economy.

 The introduction of a negative base rate could mean that savers face being asked to pay banks for holding their money rather than being rewarded with interest. The big question is how would savers react to such an unprecedented change?

 Steven Cameron, Pensions Director at Aegon commented: “The pandemic has had widely differing financial implications for individuals. Some have lost their jobs or seen their businesses suffer, leading to immediate financial difficulties. Others have found that restrictions on what they can do has led to them saving more money every month. Despite the super-low interest rates available from High Street savings accounts, much of that money is currently sitting in cash.

 “There’s increasing speculation that in the coming months, the Bank of England could reduce the base rate further, making it negative. The intention here may be to encourage spending to get the economy ticking over at a faster rate, but the prospect of individuals being charged to keep money in the bank would be a real game changer and it’s not clear how savers might react.
 
 “The prospect of being charged to hold savings in cash is likely to increase the numbers who are already reviewing their savings solutions with a view to finding an alternative home. Research** conducted at the end of last year showed that worryingly, some individuals might react to a charge on money held on deposit by withdrawing it and ‘keeping it under the mattress’. This would not be a good outcome and if interest rates do go negative, there will be a huge need for support and advice to make sure individuals do what’s in their best interests.

 “Others in the survey indicated they’d react to negative interest rates by investing some of their current cash savings into investments such as stocks and shares ISAs or pensions. As well as supporting the economy, this also means individuals have the potential to get higher returns although this is by no means guaranteed. Another reaction might be to pay off mortgages or other debt charging higher interest, which would save individuals money shorter term and also improve financial resilience longer term.”

 * Bank of England policymaker Silvana Tenreyro’s speech – Let’s talk about negative interest rates
 ** Aegon research with Opinium who surveyed 2,000 adults between 23-26th October 2020
  

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