MSE News: Inflation rise means all savings are 'losing' accounts

StevieJ

nrsql wrote: »

Have a look at the AU$ rate. in 2008 it was around 2.3-2.5 now it's around 1.6.
It seems to fairly closely match the ftse movements. Could be that the market recovery isn't really a recovery just that sterling has fallen it looks like it has risen. If it was priced in another currency (one that hadn't slumped) I think it would look very different. Means that investments have really been a hedge against falling sterling.

If only I'd bought that property in Australia.

Maybe that would be a case of 'out of the frying pan'?

Australia's budget is "bxggered", the nation's economic boom will "unwind scarily fast" and the outlook for the next year is "ugly", a leading economic forecaster has warned.

http://uk.finance.yahoo.com/news/Australians-warned-budget-tele-817570227.html?x=0

[Deleted User]

dunstonh wrote: »

Savers using cash to supplement their pensions need to use other products. Low interest rates doesnt change that.

I think very many pensioners would disagree with that! If for example you go into retirement with a decent pension, a mortgage free home and a couple of hundred grand cash then supplementing your pension with that cash can be a very good idea. Your pension gives you an income, but if you die early it's lost. Having cash gives you lots of options. You can use a little each year to supplement your pension, but if you fall in love with a little villa in Spain you can buy it there and then. If you find out your partner has only a couple of years to live you can blow the lot on making the most of your time together. You keep your options open. Many people save all of their lives so that they can SPEND and enjoy life in retirement, and sadly with too many of them it becomes such a habit that they have a frugal retirement and die with thousands of pounds worth of savings and investments. A pension gives you the security of an income for as long as you live, but the cash allows you to really live.

In this situation all that many people want is for their lump sum to more or less keep up with inflation. Provided they can achieve that then they simply wouldn't want to take a risk with investments in the hope of getting more - after all, you can't take it with you! It is of course a concern when interst rates aren't keeping abreast with inflation, but provided it doesn't go on for too long it's simply not a big deal as the good years balance out the bad years.

You need to take account of what people are comfortable with and what they want from life. Often what seems like the perfect solution to a IFA would mean misery and worry to the person that owns the money!

System

It is a fallacy to compare savings interest rates with RPI or any other sort of index.
Just as pensioners have different spending profiles so aren't catered for in the main indices, so have savers. Whether you are gaining or losing depends on what YOU are going to spend the money on.

If you are keeping it to spend on a bundle of RPI items, then yes, it is losing money. But if you are saving for a house deposit, and house prices are falling, then you are gaining even if the interest return were zero.

dunstonh

Your pension gives you an income, but if you die early it's lost. Having cash gives you lots of options.

1 - who said anything about pension being the only other option?
2 - who said pensions have to be lost if you die?

Cash has its advantage when it comes to accessibility. However, its disadvantage is the shortfall risk and inflation risk. Those risks have always existed with cash.

You need to take account of what people are comfortable with and what they want from life. Often what seems like the perfect solution to a IFA would mean misery and worry to the person that owns the money!

Risk is not on/off. Its a sliding scale. Cash is not and has never been a risk free option for the provision of income. We are now in a period where the risk of cash is being shown up more than when it is when interest rates are higher.

nrsql

StevieJ wrote: »

Maybe that would be a case of 'out of the frying pan'?


http://uk.finance.yahoo.com/news/Australians-warned-budget-tele-817570227.html?x=0

That's why I didn't go for it. Too much of a coward.
It probably will have problems at some point but has a lot of the resources the lack of which is causing the uk problems - minerals, industry, proximity to emerging markets, clement weather, space, ...

All of which have kept the economy boyant.
But it's not just AU - that's just example because I have interests there.
The main point is that sterling valuations are covering up a lot of issues.

[Deleted User]

dunstonh wrote:

Cash has its advantage when it comes to accessibility. However, its disadvantage is the shortfall risk and inflation risk. Those risks have always existed with cash.

Yes.

dunstonh wrote:

Risk is not on/off. Its a sliding scale. Cash is not and has never been a risk free option for the provision of income. We are now in a period where the risk of cash is being shown up more than when it is when interest rates are higher.

Yes.

But the risk with cash can be so low that it's a bit of a non-issue if you keep on top of things.

Say for example you put 200k into a selection of high earning interest accounts. You can monitor it and make sure your savings are keeping up with inflation. If you reach a stage where you feel that you are loosing against inflation you take your money out of the bank and do something else with it. (Assuming you can find an acceptable alternative).

We've now reached a stage where it's impossible to find accounts that keep up with inflation. That results in a kneejerk panic reaction to ditch savings and find somewhere offering greater returns. Lots of people feel VERY uncomfortable about this as those alternative offering greater returns 'typically' come with big risks:

• There is no guarantee that you'll get back what you put in, let alone keep up with inflation
• Unlike savings, if things go badly you can't pull out your money and put it elsewhere without sustaining big losses. Whereas high inflation and low interest rates erodes your capital very, very slowly (slowly enough for you to take action before any significant damage is done), the alternatives to savings *can* be virtually wiped out overnight. Lets face it, we're living in a time when banks, even whole countries are going bankrupt. If you haven't felt comfortable about investing in more stable times then now probably isn't the time to change the habits of a lifetime!

But for many there is no need to panic. If you've enjoyed above inflation rate interest in previous years you can afford a few lean years and still stay on target.

Clifford_Pope wrote:

It is a fallacy to compare savings interest rates with RPI or any other sort of index.
Just as pensioners have different spending profiles so aren't catered for in the main indices, so have savers. Whether you are gaining or losing depends on what YOU are going to spend the money on.

If you are keeping it to spend on a bundle of RPI items, then yes, it is losing money. But if you are saving for a house deposit, and house prices are falling, then you are gaining even if the interest return were zero.

I agree completely. I'd love to see what these things are based on s I'm sure I'm living better and spending less than I was a few years ago. I'm not spending the money on the same things as I was 5 years ago. In my case this is through luck/chance. But certainly it should be possible to go some way to beat inflation by adjusting spending patterns.

dunstonh

But the risk with cash can be so low that it's a bit of a non-issue if you keep on top of things.

Say for example you put 200k into a selection of high earning interest accounts. You can monitor it and make sure your savings are keeping up with inflation. If you reach a stage where you feel that you are loosing against inflation you take your money out of the bank and do something else with it. (Assuming you can find an acceptable alternative).

Remember that we are talking about income here. So, the interest is being withdrawn. That leaves the capital.

1 - If the person lives on the interest only and makes no capital withdrawals that £200k will be worth around £130k in 10 years time in spending power. The spending power of the interest will be lower as well
2 - if the person lives on the interest and has to top it up by making periodic withdrawals against that capital then a spiral of lower income and increasing capital withdrawals will see the person potentially end up with nothing.
3 - scenario 1 will usually end moving into scenario 2 at some point.

Lots of people feel VERY uncomfortable about this as those alternative offering greater returns 'typically' come with big risks:

As already said, risk is not on or off and there is no need to jump right between both ends of the risk scale. Investing is a different type of risk but you dont need to go gung ho up the risk scale. Those people will also feel uncomfortable when their money runs down by using savings accounts. They need to understand ALL the risks and not just focus on investment risk.

Unlike savings, if things go badly you can't pull out your money and put it elsewhere without sustaining big losses.

Depends on what you mean by go badly. Most modern investments are open ended and have no penalty on withdrawal.

Whereas high inflation and low interest rates erodes your capital very, very slowly (slowly enough for you to take action before any significant damage is done), the alternatives to savings *can* be virtually wiped out overnight.

Again, you are focusing on going gung ho. Also, you are ignoring the erosion in real terms that savings will suffer.

[Deleted User]

dunstonh wrote: »

Remember that we are talking about income here. So, the interest is being withdrawn. That leaves the capital.

1 - If the person lives on the interest only and makes no capital withdrawals that £200k will be worth around £130k in 10 years time in spending power. The spending power of the interest will be lower as well
2 - if the person lives on the interest and has to top it up by making periodic withdrawals against that capital then a spiral of lower income and increasing capital withdrawals will see the person potentially end up with nothing.
3 - scenario 1 will usually end moving into scenario 2 at some point.

The scenario that I've been describing is very different, so we're not talking about the same thing at all!

I have a decent pension and a large, mortgage free home. The pension *should* be enough to live comfortably on but if not there will probably be an option to downsize or release equity from my home.

I also have £200k cash. I considered investing some of that to further supplement my pension. But that's pretty well covered, and lets face it, I might not even reach retirement age! I've saved all my life so I decided that now is the time to start spending. I didn't want to blow the lot all at once so decided to work out how much a year I could spend. I *might* decide upon a big purchase at some point, but right now I just want to use a portion of the money each year for luxuries.

I retire in 20 years time so my pension will kick in then. So ignoring inflation and interest I can spend 10K a year. Provided interest rates stay above inflation I can afford to increase my annual drawing in line with inflation. Up until recently my lump sum was growing faster than inflation so I can afford to weather poor interest rates for a while. Still a way to go before more risky options hold any appeal for me.

Again, you are focusing on going gung ho. Also, you are ignoring the erosion in real terms that savings will suffer.

I'm not focussing on going gung ho. 'Safe' investments can go very badly too. As an example, my father (risk adverse all of his life and did very well out of it) was persuaded by advisors to invest his lump sum on retirement. He was assured that this was a very low risk course of action. That was just before the big stock market crash in the 80's. His lump sum was pretty much wiped out overnight and it never did fully recover. It happens. And no one can predict *when* it's going to happen.

I'm not ignoring erosion of my savings in real time - far from it - I'm monitoring the situation closely. So far I haven't experienced any real term erosion of my savings. In previous years interest has beaten inflation. I'm loosing a little bit right now, but not enough yet to eat away the profits of previous years.

My gut feeling now is that I want to do my best to avoid tying into anything for a while. That includes fixed term savings accounts and investments. The whole world seems so unstable. As long as I'm still keeping ahead of inflation I prefer to sit tight !

ed123_2

.......the stock market is a poor option for someone in retirement......the general advice is for someone to withdraw from shares as they approach retirement, they are a long term investment 10-15years....it makes me laugh when they say only invest what you can afford to lose....I don't know about you but I can't afford to lose anything!
The recent reports that invest companies/pension providers etc take up to 75% in fees also inclines one towards cash.

baby_boomer

All governments in mega-debt will tend to let inflation rip.

This government may be more hypocritical over the matter but it is to be trusted a little more on inflation than a Labour government should be.

The issue is whether to move the inflation target. If the government moves it upwards the government will be blamed for inflation. In the meantime fingers - like the OP's - can be pointed at the Bank.

I agree that the charade can't go on for ever.

But savers are still better off under the Coalition than any alternative.

Even if the Telegraph says they're better off in the stock market.