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Interest rates could stay at rock bottom for another decade 

Britain could face 20 years of rock-bottom interest rates as economists believe desperate saving by people in their 50s and 60s will create a glut of cash that forces down market rates.
After 10 years of ultra-low interest rates since the financial crisis, this extra pressure from savings could mean another decade at sub-2pc interest rates, analysts at Berenberg Bank believe.
“Interest rates will be lower for (a lot) longer, potentially for at least another decade,” said Berenberg’s Nick Anderson.
“If this sounds unrealistic, history is clear. Across developed economies between the early Thirties and the mid Fifties, interest rates remained at very low levels. In the case of the US, Canada, the UK and the Netherlands short rates were close to zero throughout this two decade period.”
On average Britons are saving far less for retirement than they need to, if they are to enjoy the typical wish for income of roughly two-thirds of their working earnings.
Interest rates could stay at rock bottom for another decade 

Interest rates stayed unusually low for two decades in the mid-20th century, and Berenberg sees no reason this could not happen again

Credit:
Berenberg Bank
Yet many do not understand how much saving this requires, or are unable to save up early in their working life.
The state pension plus private savings of 8pc of earnings – the target as auto-enrolment is introduced – will give the average worker a retirement income of around 45pc of their pre-pension earnings, the Pensions and Lifetime Savings Association (PLSA) estimates.
To get the typically desired 67pc, those private savings will have to rise to 12pc. Currently there is a significant shortfall – the PLSA estimates around 50pc of households are at “high risk” of missing this goal.
Surveys increasingly indicate Britons plan to rely on the value of their home to fund their retirement, rather than workplace pensions, even though Mr Anderson fears that either selling up to downsize or releasing equity are risky and often disappointing options.
Interest rates could stay at rock bottom for another decade 

Britons are becoming less keen on workplace pensions despite living for longer after retirement

Credit:
Berenberg Bank
He believes that people in their 50s and 60s often realise their predicament too late, leading to a surge in savings by those who are close to their planned retirement age, and lower spending among those who have recently stopped working.
“Economics 101 says that people save regularly throughout their careers and then stop on retirement. The evidence from Japan and elsewhere, however, suggested that something different was happening,” he said.
“People leave saving for retirement to later in their careers, usually save too little and become cautious once in retirement. If planned savings actually rise rather than fall as people approach then enter retirement, then this will create a headwind for real interest rates.”
Bank of England holds rates but expects to hike within months
State pensions are also coming under pressure as populations age, creating more pensioners and fewer workers paying taxes to support them.
In much of Europe Berenberg predicts state pension provision will have to be cut by around 30pc per person in the coming decades to make the retirement benefits affordable.
Britain should be less affected, however, as the state pension is relatively low in the UK and the demographic shift is less severe.
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