Retirement, Saving and the Base Rate

By the time we retire, we (should) all aim to have enough money set aside to ensure a comfortable standard of living in our latter years. The way we do that can differ: some people put their trust in pensions; others in property; others in stocks and shares; still others in a combination of investments.

Here, though, we’ll have a look at straightforward savings: at people who like the idea of putting money in a savings account and watching it grow over time as (a) they add to it and (b) it accrues interest.

For anyone who’s thinking of saving up to help fund their retirement, it’s important to understand about the base rate and how it affects the interest rate paid on savings accounts.

The base rate, set by the Bank of England, influences how much interest banks will charge on mortgages and loans – and pay on savings. ‘The Bank,’ its website states, ‘sets interest rates to keep inflation low to preserve the value of your money.’

Right now, with CPI inflation at 5% (October’s figure, the latest available), it follows that the actual ‘real terms’ value of money is falling quickly. Inflation should be around 2%, the target set by the Chancellor, but it’s been well over that target ever since December 2009.

It’s been a contentious issue for some time now – particularly among savers, who have, in general, seen the returns on their savings plummet since the base rate dropped to an all-time low of 0.5% in March 2009.

When inflation outstrips returns on savings, it means those savings are actually worth less as time goes on – that ‘money in the bank’ might be growing, but not as rapidly as costs are going up. Figures from the Bank of England show that savers had (by September) collectively lost out on £43 billion of interest, thanks to the low rates of interest paid on their savings. For someone who was counting on that interest, it’s bad news indeed.

On a brighter note, savers who are also borrowers might find the money they’ve saved on their mortgage actually outstrips the loss on their savings.

For many people with variable-rate mortgages, the interest charged on their mortgage dropped a long way when the base rate did. In other words, their mortgage payments have been far lower than they ever expected: Bank of England figures show that borrowers have collectively saved £53 billion since the base rate dropped to 0.5%.

If you like, you can see this as proof that every cloud has a silver lining – after all, plenty of people out there see property as a great way of saving up for retirement.