Savers, especially pensioners hit hard by 0.5% rate cut

09 January 2009 / by Rachel Mason
While those with tracker mortgages are rejoicing in the Bank of England's decision to slash the base rate to 1.5 per cent – the lowest it has been in 315 years - the news is much less welcome for savers.

Although yesterday's historic cut has been welcomed by many mortgage holders – some of whom have seen their mortgage payments almost half in the past year - savers have been hit hard, especially the 12 million elderly who rely on interest from their savings to top up their pensions.

"There will undoubtedly be many older savers left feeling penalised for their prudence," says Gordon Lishman, Director General of Age Concern.

"Many older people who rely on the interest from modest savings to top up their income will be anxiously counting the cost of recent cuts; particularly as so many are already struggling to pay high household bills."

Some of the best savings accounts deals have already been removed, and economists are warning that if the rate continues to fall, savers could soon be paying banks to look after their money rather than gaining interest on their hard earned cash.

Many instant access accounts already pay less than one per cent, while according to Moneyfacts, the average rate on savings accounts has fallen to 1.57 per cent - down from 3.83 per cent last September.

What this means in real terms is that a pensioner with £5,000 in savings has seen their yearly interest fall by £111 to just £71.50 according to figures from Moneyfacts.

Although the news is bleak for savers, there are still some good deals on the market, for example, the ING Direct savings account which is offering 5 per cent, but these could soon disappear from the market, so the advice is to shop around now and bag a deal while they are still available.

"Older savers should ensure they are making the most of their money by checking they are not over-paying the tax on their savings and shopping around if they feel they are getting a poor deal," said Mr Lishman.

There are also other options for pensioners struggling with ever falling incomes – equity release has also become more popular over recent months, with Safe Home Income Plans (SHIP) predicting this week that equity release will see a further boost - hitting £1.4 billion by the end of the year.

Following yesterday's cut – the fourth consecutive cut since October, Sharon Bratley, Chartered Financial Planner at Fairinvestment.co.uk says that pensioners are going to be forced to consider other options to supplement their incomes, and is not surprised that the equity release market is expected to grow.

"Pensioners, are finding that their finances are being squeezed so many are looking for ways to boost their income, and equity release is one of the ways in which older homeowners can do this," she said.

"By opting for an equity release plan, whether it be a lifetime mortgage or a drawdown plan, homeowners can start benefiting from the capital they have locked up in their homes without actually having to move.

"Falling house prices will of course affect the amount of money available, but equity release remains a popular option, which for many people makes perfect financial sense, especially now."

Check out the latest savings accounts, mortgage deals and find out more about equity release.

© Fair Investment Company Ltd