Spend or save?

When returns fall along with interest rates, should we even bother saving?

This is the dilemma that many consumers face when rates are low.

The deputy governor of the Bank of England says that low interest rates paid on savings accounts should encourage savers to go out and spend their money in order to help kick-start the economy.

Charlie Bean, a member of the committee that determine the Bank rate, advised savers to "eat into" the capital they have built up throughout periods of low rates - now being as good a time as any, as the Bank rate has been at a record low of 0.5% since March 2009.

He commented to Channel 4 news: "What we are trying to do by our policy is encourage more spending, ideally we would like to see that in the form of more business spending".

"But part of the mechanism that might encourage that is having more household spending so in the short term we want to see households not saving more but spending more."

He added that savers benefited from significantly higher rates in the past and could now eat into some of their capital while rates remain low.

But is this good advice? Take a look at two opposing views.


Spend Spend Spend:

Vicky Redwood, senior UK economist at Capital Economics, says:

"Charlie Bean has been criticised for suggesting that consumers may need to dip into their savings in order to spend more.

"But that is exactly what lower interest rates and looser monetary policy is designed to encourage. Lower interest rates reduce the returns on saving and hence increase the incentive to spend - with higher consumer spending then boosting overall economic activity.

"Indeed, data released this week by the Office for National Statistics showed that without a sharp drop in household saving in the second quarter, the drop in households' incomes would have fed directly through to a sharp drop in their spending - and potentially prompted the economy to slip back into recession.

"Of course, in the longer-run, households need to save more and borrow less - as I am sure Charlie Bean would agree.

"But right now, with the recovery faltering, what the economy needs is for people to get out and spend."

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Brian Johnson, insolvency partner at HW Fisher chartered accountants, says:

"You can see the Bank's logic, as more people spending will act as a stimulus to the economy.

"However, by urging people to spend the Bank of England is asking the British public to take a real leap of faith, especially when faced with considerable uncertainty in the form of public sector cuts and fiscal tightening.

"The British public will also be baffled by the mixed messages it is receiving. On the one hand we have the government saying that our country needs to massively cut its debt, and as soon as possible, on the other hand we have the Bank of England telling us to spend, spend, spend.

"Charlie Bean's message also completely contradicts what people have been urged to do over the past few years, namely pay down their debts and prepare themselves for the age of austerity.

"A paradox of thrift it may be but for the Bank of England to openly encourage the public to spend in such an uncertain climate is a dangerous strategy that may well backfire."

While rates may not be as high as they were in the boom times before the credit crunch, savers are still able to get some reasonable rates on some savings accounts, Isas and fixed rate bonds.

Alternatively, those looking to secure higher returns may wish to consider stocks & shares ISAs, allowing them to invest in shares but without having to pay income tax on their returns.