High street bank Northern Rock sought emergency funding from the Bank of England on 13th September 2007, prompting the first run on a bank for more than a century. The stream of events that followed flung Britain into financial turmoil. We look at how finances have been affected over the last 10 years and whether savers and investors are worse or better off.
Pensions
Before pension freedoms most people used their retirement savings to buy an annuity – an insurance contract that pays an income for life. The best annuity rate available 10 years ago was 7.2%, according to Moneyfacts, the data firm. Today the best rate on the market is just 4.8%. That means that a pension of £100,000 would have generated an annual income of £7,230 in 2007. Today that same money would buy an income of just £4,880 -that’s £2,350 less to live on each year.
Pension freedoms, which came into force in 2015, ended the requirement to buy an annuity so that savers can choose to invest the cash however and wherever they see fit using a drawdown plan. This allows you to take a regular income from a pension while the rest remains invested.
However, many prefer to opt for an income that is guaranteed, rather than risking their savings on the stock market. Another benefit is that annuities are paid for life, whereas with drawdown investors have to ensure their retirement pot won’t run out before they die.
Savings
Savings rates have been woefully low since the financial crisis, meaning many have taken a huge hit to income generated from their nest eggs.
The Bank of England started cutting the base rate a few months after the Northern Rock crisis to try to stimulate the economy. In December 2007 the base rate notched down from 5.75% to 5.5%. Just 12 months later it had been slashed to 2%. In March 2009 –another three months later – the base rate sank to 0.5% where it settled for almost seven years before being clipped to the current level of 0.25%.
The best rate on an easy access savings account was 6.5% in September 2007. Today it is just 1.25%.
Investments
While the world of investments was hit, over the long term, stock market investing has still been the best bet compared to cash. If you saved £10,000 into the average UK savings account over the past ten years, you would now be left with £10,460.
If however, you had invested £10,000 into the FTSE All Share index over the same period you would be left with £16,847, according to calculations by Fidelity. That’s despite the dramatic stock market crash in late 2008, the Eurozone crisis and various political risk events of the past ten years.
Fidelity also plotted the best performing asset classes. High yield bonds come top of the charts with a 10-year cumulative return of 217%. Emerging market debt came in second place, followed by US equities, corporate bonds and global equities. UK equities is only one place ahead of cash in thirteenth place returning 68% – cash returned just 17%.
The analysis of the returns of the various asset classes highlights the benefit of a balanced portfolio. While there have been some years when every single asset class has risen, and some when there was a mixture of risers and fallers, there hasn’t been a single year in which everything has fallen together.
Mortgages
It’s a slightly cheerier story for mortgages as they are cheaper than ever before. The average rate on a new loan has dropped to just 1.95% – the lowest level on record at the Bank of England.
However, there have been some major changes to the market. The financial crisis prompted lenders to get tougher on who they approve loans to. Banks and building societies scrapped using income multiples and starting delving deeper into borrower’s affordability.
They stopped offering self-certified loans which enabled borrowers to state their income without providing any proof. They also stopped offering interest-only loans for fear of people failing to repay the capital.
Lenders also started to impose maximum age limits which means remortgaging becomes difficult later in life. The changes have affected many, but the most recent numbers from the Bank look strong. By value, total mortgage lending hit £21.2 billion in July, the highest level since 2008.
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Photo by lydia harper on Unsplash
