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Alan Steel: Savers not helped by poor numeracy skills

Alan Steel 2Have you noticed the older you get the faster time flies by? It’s hard to believe that it’s five years in March since the Bank of England base rate hit 0.5% and stayed there.

Whatever benefits there have been to the UK economy, there’s no doubt the move has been catastrophic for folks needing income from their savings whether inside pension plans or deposits. This is especially so with the average long term saver having accumulated so little despite living through the richest 50 years in history.

A report last Autumn by the mildly eccentric actuary Ned Cazalet touches on one key reason why savers have such great difficulty making informed decisions building wealth and then producing decent levels of income from these savings. As Ned says “In that slim volume ‘The Actuaries Joke Book’ one may read that 50% of people don’t know what 50% is”.

Lack of numeracy among adults is no laughing matter, though. The Money Advice Service two years ago found that four in five of the 5,000 surveyed said they lacked confidence when making money decisions. One in eight thought the Bank Rate was still over 10%, and a quarter of the over 55s couldn’t identify the balance on their bank statement. An Investec survey two years ago found two thirds of SIPP investors admit to not having enough expertise to manage their funds properly. Ouch.

Earlier this month a Nationwide building society spokesman boasted of the growing balances of customers’ Cash ISAs stating that on average regular savers had built up balances in excess of £15,000 with Scottish savers in second place. The current return on their fixed rate? 1.5% a year. Many other Cash ISA savers are being rewarded with returns ( if you can justify such a positive term ) as low as 0.1%. No wonder wee High Street shops are having such a miserable time.

Meanwhile, Income Unit/Investment Trust investors have enjoyed five year returns of between 10% and 20%. Thankfully, these folks had the courage to Keep Calm and Stay Invested while commentators saw economic bogey men round every corner. Clearly, fear added to lack of numeracy spells disaster for average savers. And “ freedoms” for private pension pots won’t help.

Two things…. History tells us walls of worry are in fact good news for stockmarket investors, so be brave. Secondly , hone your numeracy skills with the simple Rule of 72. Just take the return on your savings , divide that into 72 and the answer tells how long it takes to double your money. 0.1% takes 720 years, 1.5% takes about 14 years, 12% only 6 years. Oh, incidentally past performance is not a guide for the future according to theorists.

Alan Steel is Chairman of Alan Steel Asset Management

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