The current low-interest-rate environment is a real concern for those saving for, or already in, retirement. With UK interest rates currently sitting at just 0.1%, there are worrying implications for those with cash savings.
Here, I’ll explain why UK interest rates could hurt your wealth and your retirement. I’ll also look at what you can do to protect yourself from low interest rates.
UK interest rates: An alarming situation
If you’re saving for retirement, UK interest rates are a problem.
Currently, the best easy-access interest rate you’ll find is about 1.16%. Invest your money at that rate for the long term, and you’ll find that when you come to spend it, it buys you a whole lot less than you expect.
The reason? Inflation. This is the slow increase in the prices of goods and services over time. On average, it tends to be much higher than 1.16% in the long run.
Over 10 years or more, inflation can have a huge impact on prices. If you don’t protect yourself from it (i.e., earn a decent return on your savings), your money loses its purchasing power over time.
If you’re building a nest egg for retirement, you need your money to be growing at a rate that is higher than inflation.
A nightmare for retirees
UK interest rates are also a problem if you’ve already reached retirement.
A little over a decade ago, you could park retirement savings in a high-interest bank account and pick up an interest rate of 5% or more.
If you had £250,000 saved, you could generate interest of £12k to £15k per year. Add that to your State Pension and you were looking at a relatively comfortable retirement.
Today, however, it’s a different story. Invest £250k at 1.16% and you’re looking at interest of less than £3k per year.
Add that to the full State Pension, and you’re looking at retirement income of about £12k. Realistically, that’s not enough to retire in comfort.
Protect yourself from low interest rates
Whether you’re approaching retirement, or already in retirement, the best way to protect yourself from low interest rates is to invest some of your savings. Invest your money properly, and you should generate a solid return on your money over time.
One of the best ways to invest money in the UK is through a Stocks and Shares ISA. This is a tax-efficient investment vehicle that enables you to invest in a wide range of assets. You can invest up to £20,000 per year and withdraw your money at any time.
The choice you have within this ISA is phenomenal.
For example, if your aim is to build wealth, you can invest in a fund such as Fundsmith. This is a global equity fund that has turned £50k into about £250k in less than a decade. Or, you can invest in individual stocks. This approach requires more work but the rewards can be greater. For example, had you invested $10,000 in Tesla shares a year ago, that money would now be worth over $60,000.
There are also plenty of options if your goal is to generate retirement income. For example, you can invest in income-focused investment trusts such as Murray Income Trust, which offers a yield of about 4.5%. Or, you can put together your own portfolio of dividend stocks.
Invest your money wisely, and low UK interest rates will no longer be a concern.