Advisers must prepare for negative interest rates

12 Mar 2021

Bank of England governor Andrew Bailey has told banks and building societies to brace for negative interest rates, potentially as soon as August. The Bank made it clear this could happen if the economy did not bounce spritely back as Lockdown 3 was eased.

We already have negative rates in pensions. The lower-bound illustrations our systems produce for providers and platforms assume negative rates. However, a negative Bank base rate would see retail banks and building societies being charged by the Bank of England for holding their excess cash deposits for safe keeping. What will be the knock-on effects of this for clients?

Rather than calling it a negative interest rate, we can expect to see retail banks adopting a twin-track approach of setting interest rates to zero and at the same time introducing a charge on the account.

I’m not talking about the minor servicing fees today, like the £3 per month that Lloyds charges for its Club Lloyds current account. We are more likely to see banks passing on their losses from negative interest rates by charging any customers with substantial deposits. For a taste of things to come in negative interest rate land, you may look at parts of Europe where they already operate.

UBS, for example, recently announced it would charge clients with cash balances above SFr250,000 [£200,000] a 0.75 per cent per annum interest rate fee from July. Currently, the threshold for making this charge hits only the wealthiest depositors. The question is, at what threshold will our high-street banks start charging, and will that threshold reduce over time?

The same behaviour may feed through to pensions and other platform investments. What appears as ‘cash’ on a client’s platform statement is actually deposited by the platform at one or more banks, so we must expect them to pass those interest rate fees through to their own savers.

Negative rates will not simply be a talking point for advisers and clients; they may also change the advice given. Taking large withdrawals or tax-free cash from a pension may need to be deferred if the likely destination of the cash is a bank or building society in the next six months. You should anticipate the possibility of those negative interest rate fees now.

‘Potting’ strategies, which some advisers recommend for retired clients, may be less attractive if holding up to three years’ future pension withdrawals in cash means not only sitting out any investment growth but also paying banking fees on the cash holdings.

It’s now likely we will see negative interest rates this year. Advisers will rise to the challenge of incorporating them into client discussions — pointing out the benefits that banks provide, such as the ease of moving money and the FSCS guarantee on deposits of up to £85,000.

by Adrian Boulding, Director of Retirement Strategy at Dunstan Thomas
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