11 Dec 2015

Retirement savings squeezed by low OCR

9:41 am on 11 December 2015

The latest drop in the Official Cash Rate could put the squeeze on retirement savings, with those nearing retirement and the elderly worried about the low rate.

Elderly woman holding person

Photo: 123RF

Older New Zealanders face the biggest hit from a fall in term deposit interest rates, after the Reserve Bank cut the cost of borrowing yesterday to a record low of 2.5 percent.

While the news was good for home buyers, those with savings in term deposits found it hard to swallow.

The central bank has now reduced rates four times since June, due to a slowing economy and weak inflation, and it was expected many banks would again reduce the interest rates for those with money in long-term accounts.

RNZ approached people on the streets of Wellington, who were initially reluctant to talk about their finances.

But those who did, such as Sue, said they were very worried about the slump in their savings.

"It can screw you really because we're down to about 3 percent bank rate of interest and we've seriously got to look at other ways of investing money. If you don't have property then what do you live on for the rest of your life? So yeah, it's a problem for us.

"Any money we've saved we've got it in deposits and safe things, but now there's no return on them."

One woman nearing retirement said they were at a stage in life where the news was very unwelcome.

"It makes it very difficult. Where do you turn to? What else can you do? I mean you have to look at other types of investment and gosh, everything looks uncertain at the moment."

Greypower national president Terry King said the interest from term deposits helped with their weekly budgeting, but the money that bolstered their superannuation was disappearing.

The latest OCR news was frightening those nearing retirement and older generations, he said.

"Many elderly have managed to save a small nest egg for retirement and the interest supplements their superannuation. Others have a small capital sum which is used for household maintenance and other emergencies. And on one hand rates, electricity and other household costs keep rising, while supplementary income based on bank interest rates are falling. The reality is that many people are hitting a brick wall."

Mr King said in the past when things got tight they would look to alternatives such as finance companies, but their collapse, along with that of the sharemarket in 1987, meant a lot of older people would not touch them.

Reserve Bank governor Graeme Wheeler acknowledged the cut in the OCR was a hard decision for savers to swallow.

"Absolutely. I mean one of the consequences of having very low interest rates that you've seen throughout the world is what it does to people who are relying on fixed income for example for their retirement, it's a huge issue."

Mary Holm

Mary Holm Photo: SUPPLIED

Mary Holm, a financial columnist and seminar presenter, said she could understand why people were worried, but said there was no need to panic.

"I can understand why they worry but one thing that people don't take enough notice of is that inflation is really low and term deposit rates are still quite a lot higher than inflation. That means that you're still getting ahead if you put your savings in a term deposit, then when you take it out again you can buy more than you could when you put the money in."

Ms Holm said there was a lot of variation in interest rates for term deposits and urged people to go to interest.co.nz or depositrates.co.nz, which listed interest rates offered by different banks and gave the opportunity to shop around.

She said people should remember that back in the 1980s term deposit interest rates were about 12 to 14 percent, but when they took it out it bought less than when they put it in because inflation was even higher whereas now inflation is currently 0.4 percent.

Mr Wheeler said inflation is expected to rise and be inside the central bank's 1 to 3 percent target band by early next year.

Investment analyst Jonathan Eriksen said people with Kiwi saver accounts should sit tight for now, but income funds which have been developed in response to low interest rates were a good option for others.

"They are a mixture of cash and bonds and a few shares, which try and have a higher rate of return than term deposits, with a little bit more risk, of course, because they've got shares in them, but giving a rate of return of four or five, or even six or seven percent per annum."

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