Are savers being short changed?

pqrdef

lisyloo wrote: »

No, but they did know they would get older and become more risk averse and should therefore have had conservative expectations in later life.

0.5% is beyond conservative, it's unprecedented. Especially when the Bank is supposed to have a remit to use interest rates to control inflation.

This is a double whammy for planning retirement income - more inflation provision needed, from less income.

Inflation-linked annuity rates have been clobbered. And if the best rate you can get is say 4% rather than 6%, all your pension contributions, long-term savings and other sources of capital would need to be 50% bigger to compensate.

cloud_dog

pqrdef wrote: »

0.5% is beyond conservative, it's unprecedented. Especially when the Bank is supposed to have a remit to use interest rates to control inflation.

This is a double whammy for planning retirement income - more inflation provision needed, from less income.

Inflation-linked annuity rates have been clobbered. And if the best rate you can get is say 4% rather than 6%, all your pension contributions, long-term savings and other sources of capital would need to be 50% bigger to compensate.

But you cannot look just at the headline savings rate you have to track the difference between interest rates and inflation.

I know that interest rates and inflation are on par / behind the curve but how does that compare historically. There's no point getting 10% interest if inflation is 15%.

lisyloo

that paper losses aren’t important and that somehow it miraculously all comes out in the wash after 5 or 10 years

I don't believe anyone said that.
No-one has denied there is a risk of nominal capital loss.
What doesn't seem to be appreciated is that savings has the risk of capital loss in real terms and if people restrict themselves to saving they are speculating on variable rates, so saving involves risk and speculation (it's a different type of risk and speculation from shares, but it still involves both risk and speculation).

0.5% is beyond conservative, it's unprecedented.

We are indeed in very unusual times right now.
But any assumption that savers made about return is exactly that - it's an assumption. It might have been reasonable at the time but variable rates have always been subject to change.
No-one has a right to expect a certain return unless they have a contract for it e.g. a fixed rate.

This is a double whammy for planning retirement income - more inflation provision needed, from less income.

It's a triple whammy with increased life expectancy.
That's an especially unfair that one !!

Inflation-linked annuity rates have been clobbered.

I know it's especially unfair for women - we live longer. Who do I complain to about that as I reckon I'm getting short changed with this extra life expectancy??
Draw down until 75 ?

And if the best rate you can get is say 4% rather than 6%, all your pension contributions, long-term savings and other sources of capital would need to be 50% bigger to compensate.

This living longer stuff is really unfair isn't it !!

I agree we need to put more into our pensions these days, but those who are old enough to be unable to do something about it have also benefitted from good returns eariler on in their lives.
The people who are in the worst posistion are the youngsters just starting out. The pensioners are not the ones who are going to suffer most as they've had good returns through most of their lives.

In summary I think this is definitely a case of glass half full/half empty. I prefer to accept the world as it is (if I can't change it) and put my efforts into doing the best I can with it. I probably still haven't got it right but I do keep it under review which is all you can do.

Rollinghome

lisyloo wrote: »

I don't believe anyone said that.

I wasn't suggesting that anyone in this thread has said that (not that I've read it all anyway) but it seems to be a widely accepted misconception and one often used by advisers to encourage investment in expensive markets.

lisyloo wrote: »

What doesn't seem to be appreciated is that savings has the risk of capital loss in real terms

I'd assumed it was quite the opposite. Most people seem to fully understand that if the interest rate is less than the rate of inflation then they suffer a capital loss. Hence the complaints.

lisyloo wrote: »

The people who are in the worst posistion are the youngsters just starting out.

Are they? I know they often seem to think so. Presumably the many elderly now living in poverty on nothing but a state pension were f eckless and have no one but themselves to blame. Ah, those golden days when kids could just have fun working in a coal mine instead of slaving away on a media studies course at uni into their twenties.

lisyloo

Are they? I know they often seem to think so. Presumably the many elderly now living in poverty on nothing but a state pension were f eckless and have no one but themselves to blame. Ah, those golden days when kids could just have fun working in a coal mine instead of slaving away on a media studies course at uni into their twenties.

I take your point
It really depends a bit on which age group you are looking at.
Those in their 50s and 60s didn't generally have appauling working condition and students these days cannot take a course without getting into quite large amounts of debt.
But I do take your point despite the extremes presented.
I do have relatives in their 80s and I do understand that in their early years they had no opportunity (or knowledge or expectation) of starting a pension.

I'm just not sure what people think they will acheive by moaning.
It's not going to improve the rates is it?
The best we can all do is consider the alternatives, shop around get advice and consider restructuring our financial plans and changing our expectations.
It would be far better IMO to change your expectations to line up with reality rather than spend your entire life being bitter and twisted about being short changed (whether justified or not).

I actually felt shortchanged as a student when I only got a partial maintenance grant and it seemed very unfair to me that those from poorer backgrounds got a full grant and those from rich backgrounds didn't have to worry, but if you were in the middle you had to rely on your parents who weren't that well off.
I look back at it now with a totally different perspective and consider myself very lucky that I had to pay no tuition fees and did not start out my working life with a massive debt.
No point being bitter is there?

nilrem_2

cloud_dog wrote: »

There's no point getting 10% interest if inflation is 15%.

With respect that is not always the case, at least if you are getting 10% you do have some income to spend and you do have a choice on what to spend it on even with a 15% inflation rate, however if you live off savings interest (quite a few people do) then it's irrelevant how low inflation is if the only interest you get is so low that you have very little to spend!

lisyloo

however if you live off savings interest (quite a few people do)

That's a choice though isn't it? with risk (of real terms capital loss) and speculation (on variable rates).

I find it a little odd that someone that speculates on shares, horses or the lottery would receive absolutely no sympathy if their bet didn't pay off, but somehow people that speculate on variable retail banking rates and take a risk with real terms capital depreciation are somehow different?

If someone took a fixed rate or an index linked annuity that would be different, but relying on variable savings income is a form of speculation (which currently happens to be not paying off).

Rollinghome

lisyloo wrote: »

I'm just not sure what people think they will acheive by moaning...
It would be far better IMO to change your expectations to line up with reality rather than spend your entire life being bitter and twisted about being short changed (whether justified or not).

C'mon, don't be mean, let 'em have a moan if it makes them feel better.

I fully understand why people are peeved when they seem to be losing their savings as a result of government policy - even though it's not something that hasn't happened before. I also understand why lots of people don't want the risk of investments. They aren't greedy, they just want to keep what they've saved. Could be argued that it's like moaning at the weather but understandable enough.

Perhaps it was the experience of the grandad generation that's led to the unrealistic expections of today's kids. Certainly, those now in their 60s and 70s were luckier than their parents (outside of the privileged middle-classes) even if they grew up on rationing or without their parents due to evacuation.

I'm of the first generation in my family not to have been sent to war. My grandfather died from gangrene in the mud of the Somme without ever seeing his only son. My father fought at Arnhem and wasn't recognised by his children when he came home. We'd cleverly waited for the invention of antibiotics and timed our entrance just about right. By the time we got to eighteen they invented the "pill" bang on cue and motorways without speed limits to scorch down.

On the other hand it wasn't all quite as easy as sometimes assumed and not always helpful to pretend that it was. To buy our first house we had to save a one third deposit and then grovel to the building society manager for the rest which was limited to three times my income. No expection of a 100% mortgage then. The only new furniture we had was a double bed. For three months we used another old single bed covered with a curtain for a sofa and a suit-case for a table. All we had to eat was an old boot and two potatoes which had to last a week. (Ok, the bit about the old boot and potatoes was an exaggeration but all the rest is true.)

We also have the problem now of a more divided society with a higher proportion of fortunate people who can expect help from parents and inheritances which makes it more difficult for those who can't. There's the risk of a permanent underclass that's yet to be addressed.

So I fully agree with your conclusion that the real problem has been unrealistic expectations across the generations. Things aren’t quite as good as we’d hoped but not as bad as they could be. It's a hassle but we've got to deal with it.

lisyloo wrote: »

No point being bitter is there?

Nope.

jennifernil

Good post. There are quite a few scenarios there that I recognise!

lisyloo

C'mon, don't be mean, let 'em have a moan if it makes them feel better.

Ok, go ahead, you poor down trodden lot

But after a good old moan, then review your asset allocations to make sure they are suitable and/or adjust your expectations for the future and/or your financial plans.

When I started working 20 years ago I had hope of retiring at 60 if I saved well or possibly even earler.
I have started putting more into my pension (another 5% of income which is quite significant) but I have also changed my expectations to 65 minimum despite putting more in.
Moaning on it's own it's no good, but if it result in actions or a shift or expectation then that's probably a good thing long term.