What you should do now to protect your finances from negative interest rates as Bank of England hints they could drop
AS the Bank of England starts to plan for the possibility of negative interest rates, we look at how best to protect your finances.
Yesterday, the central bank voted to keep the base rate at a record low of 0.1% as the true economic impact of the coronavirus crisis continues to unfold.
But it also agreed to discuss the possibility of taking rates below zero for the first time.
Banks and building societies use the base rate to decide how much they charge borrowers and pay savers so it's safe to say that it will have an impact on the money in your pocket.
If interest rates turn negative, borrowing becomes cheaper for consumers but it means that savers will effectively pay banks to hold their cash.
The BoE said that it would only plan for the possibility such drastic action will be needed over the final three months of the year, not that they were guaranteed.
It added that so far the economy has performed "a little stronger" than expected, after inflation dropped to 0.2% in August.
But there are fears that an economic recovery will be halted by mass unemployment once the government's furlough scheme ends in October.
Here's how you can protect your finances if interest rates turn negative.
Move your savings to a fixed-rate account
Unfortunately for savers, negative interest rates mean you could end up being charged by your bank or building society to hold your cash.
This would be instead of earning interest on it like you do now, even if the rates are low.
Personal finance expert at Hargreaves Lansdown, Sarah Coles, said that even if the base rate goes below zero, we're unlikely to see negative rates on personal savings accounts.
She said: "Banks are very wary about introducing them, because there’s a risk people will withdraw their money and either spend it or keep it lying around the house.
What does negative inflation mean?
NEGATIVE inflation - or deflation - is when the price of goods or services is falling.
Some experts have said we could see negative inflation as a result of coronavirus pressures on the economy.
This would mean lower prices for consumers, which on the surface is a good a thing.
But the Bank of England points out that when prices fall, people often don't make purchases as they hope costs will fall further.
And when people stop buying, less money is going to businesses and into the economy, and in turn those businesses may cut wages or make job losses.
It can also mean your debts get more expensive, as the amount you owe remains the same, yet you may find it harder to repay debts or the item, such as house or car, may depreciate in value compared to its initial worth.
"So we’d be more likely to see charges being introduced on accounts, to recoup the cost of holding money without specifically charging interest.";
To avoid a shrinking nest-egg, Sarah advises locking into a fixed-rate savings account now.
You'll be guaranteed to earn interest for the full term of the account even if the base rate changes.
But before locking in, you should be aware that most fixed-rate accounts charge a fee if you need to access the cash before the term is up.
You also won't benefit from any interest rate rises while your money is stashed in the account.
Sarah added: "Savings accounts would be likely to offer even lower returns, so if you’re considering fixing some of your savings for a period, and locking in a rate, don’t put it off in the hope that there might be something more generous on offer in future."
Check out our guide to finding the best savings account for you.
Don't be afraid to ditch your bank and switch
Sarah also warned that bigger banks are more likely to take advantage of negative interest rates at the expense of customers.
She told The Sun: "They already know they can cut the savings rate to 0.01% and people stick with them, so they might be able to cut it below zero, and introduce a charge - safe in the knowledge that people would stay put."
This is in contrast to smaller banks, which tend to have been chosen specifically because of their better rates.
Sarah added: "The smaller banks would be less keen to cut rates and introduce charges, because they would be worried savers would vote with their feet."
What is the base rate?
SIMPLY put, it’s the country’s official borrowing rate, and is the rate the Bank of England lends to all the other banks in the UK.
It is incredibly important as it a guide for lenders on what rates it can offer – and therefore impacts mortgage rates, credit cards, loans and savings.
It was stuck at record low levels for a decade because of the state of the economy after the financial crash in 2008.
It was raised back to 0.5 per cent last November, the first of what many had hoped would be three hikes within three years.
The rate went up again in August 2018 to 0.75 per cent and has been held there ever since until the beginning of March when it was slashed to 0.5 per cent again.
The shock announcement at the end of March - where it dropped to 0.1 per cent - means it's now below a level not seen since before 2016.
If your bank begins charging you a fee for your account, don't be afraid to switch.
In fact, Royal London says you should take advantage of joining offers that rewards customers with a cash bonus as this could replace interest as a way to earn money.
For example, HSBC is currently paying customers £125 to switch accounts, while Lloyds and RBS will pay you £100 cashback to swap.
Consider investing in Premium Bonds
If your bank starts charging a fee to hold your savings account, you should consider opening up a Premium Bonds account.
Instead of earning interest like you would on traditional savings account, you are entered into a monthly draw to win a cash prize. These range from £25 to £1million.
Every £1 buys a new bond, so your odds of scooping extra cash goes up the more money you add to your account.
How to check if you've won
IF you think you might have an unclaimed prize, the best way to check depends on what info you have about your Premium Bond account.
You'll have been given both a Premium Bond holder's number and an NS&I number.
- If you know your Premium Bond holder's number, you can go to the NS&I website or download its prize checker app. Enter your holder's number and it'll tell you if you've any unclaimed prizes.
- If you don't know your holder's number, but have your NS&I number, you can use that number – which you'll find on any letters from NS&I – as well as your surname and password to log in to NS&I online and find your holder's number on the "account details" page. NS&I's prize checker app also accepts your NS&I number.
- If you don't know your holder's number or account number, you can phone NS&I on 08085 007 007 or write to it and ask for a replacement bond record to be sent to you. You should give as much detail as you can, for example your full name, address details, when and where you bought your Premium Bonds and how much they're worth.
- Alternatively, you can use NS&I's tracing service or the My Lost Account website, both of which can track down your Premium Bond details. They ask you to fill out info about yourself including your name, address, an estimate of how many Premium Bonds you hold and how long you've held them.
- If you find you do have an unclaimed prize, you'll need to write to NS&I at: NS&I, Glasgow, G58 1SB. Give as much information as you can, including your name and any information about your Premium Bonds.
- Prizes will then be sent to your home address as a warrant, which is like a cheque. Unfortunately, you can't have unclaimed prizes paid directly into your bank account.
- The process is slightly different if the Bond holder has died – you'd first need to inform NS&I of the death and then follow the steps above. Any prize money will be paid to whoever inherits the Bond holder's estate.
In 2017 it slashed the odds of winning from 30,000 to one to 24,500 to one, but increased the estimated prize pot to £83.1million compared to £68.3million.
In also increased the total number of prizes from 2.4million to 2.9million.
There's a £50,000 investment limit but the scheme is backed by the Treasury.
Of course, every month there's a risk you won't win anything but you'll break even compared to putting your cash in a traditional account that could end up charging you a fee.
Switch and fix your mortgage deal - but hold off until rates drop
Most experts agree it's unlikely lenders will start to pay borrowers to take out mortgages but interest could fall.
They're already considerably low so negative rates could be positive for homeowners.
A Royal London spokesperson said that if you're due to re-mortgage but you think that rates could drop further, then hang fire until they do.
You should then fix-in to a deal to make the most of low rates for as long as possible. Remember though, locking in means you will miss out on the benefits of any further rate drops.
If you're close to repaying your mortgage completely, you should think about using some of your savings to pay off more to qualify for a lower interest rate.
Of course, if you're currently on a fixed-rate deal you won't feel the benefit of a rate drop until you come to remortgage.
Sarah add: "New variable mortgages are likely to be cheaper, but priced with bigger margins, to protect lenders from having to pay people to borrow money.
"However, it’s not impossible that some borrowers could end up with a negative rate: it has happened elsewhere around the world."
Don't panic about your pension
Investment expert Adrian Lowcock from Willis Owen says as pensions can't be accessed until you're 55, they should be thought of as long term investments.
That means you should steer clear of any drastic moves when it comes to your retirement fund.
He advises you should diversify your pension pot to protect yourself from anything going wrong.
"Most pensions will be invested in the stock market and company shares," he explained.
"Some businesses will benefit from negative interest rates and others will struggle more because of it.
"However, your pension should be well diversified to protect against either eventuality."
Some people may be tempted to withdraw the funds if they're not seeing the benefits of keeping it where it is.
But research by finance experts AJ Bell found that around 16% of savers who withdraw funds end up putting at least some of it into a bank account.
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Tom Selby, senior analyst at the firm, said: "This might be okay if you’re building a cash savings buffer but it is a poor long-term strategy when interest rates are low, due to the impact of inflation.
"But it's an even worse strategy if interest rates turn negative."
For more on pensions and what it means depending on your age, see how to protect your pension.
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