Death of the savings habit: As the amount we put aside falls towards a record low of 30p for every ￡100, how YOU can get back on track
- Savings ratio last fell to dangerously low levels in boom years before the crisis
- Economists blame low interest rates, slow wage growth and a spending culture
- Low savings rates and cheap interest on borrowing gives little incentive to save
Savers have given up putting away money for a rainy day, figures buried in the Budget small print reveal.
We are now setting aside just ￡2 out of every ￡100 of income, according to the government-run Office for Budget Responsibility.?
That is a huge drop from the ￡6 per ￡100 at the start of last year. And it’s set to get even worse.
The official forecast predicts the so-called ratio will fall to ￡1.80 per ￡100 in the final three months of 2018 and halve to just 90p per ￡100 a year later.
It will then plunge further to a meagre 0.3 per cent in five years, meaning that just 30p for every ￡100 we have in income goes into bank and building society savings accounts.
We are now setting aside just ￡2 out of every ￡100 of income, according to the government-run Office for Budget Responsibility
The last time the savings ratio fell to dangerously low levels was in the boom years before the financial crisis, when they briefly fell below 1 per cent amid warnings that households were splurging too much and borrowing was too cheap.
But now even these low levels look like they will be surpassed over the next five years.
Economists say the dramatic plunge in savings levels is due to years of record-low interest rates, sluggish wage growth and the return of the culture of putting spending first.
Persistently low savings rates and cheap interest on borrowing gives little incentive to save.
And average rises in incomes, at 2.4 per cent, are lagging behind the 3 per cent inflation rate. This means the cost of living is eating up a growing portion of our pay and pensions.
Experts have labelled the trend ‘alarming’ and warn it is building up problems for the future.
They say it’s vital for everyone — no matter how much they earn — to have money at the ready to cover unexpected expenditure.
This is especially true at a time when the cost of borrowing can only rise, with the Bank of England hiking the base rate for the first time in ten years earlier this month.
Gloomy forecast: The official forecast predicts the so-called ratio will fall to ￡1.80 per ￡100 in the final three months of 2018 and halve to just 90p per ￡100 a year later
You should have at least the equivalent of three to six months earnings in a savings account to cover short-term emergencies — for example if you lose your job or the washing machine breaks down.
You should also keep enough to cover any big purchases you are planning in the next few years — perhaps a big holiday, a wedding or a new boiler.
And beware that you could end up having to postpone your retirement until your 70s if you don’t put money aside now.
Patrick Connolly, of independent financial advisers Chase de Vere, says: ‘It is alarming that as a nation we are not saving enough.?
We are exposed if something happens in the short term, such as unexpected expenditure or losing your job, and we are not saving enough over the long term for retirement.’
Danny Cox, of independent advisers Hargreaves Lansdown, says: ‘We are building problems for the future. Savings rates are so low, people are saying what is the point of saving? We might as well spend it.’
WHAT KILLED SAVING CULTURE
Savers have suffered falling rates for years, and over the past five years they have more than halved.
In September 2012, the average easy-access rate was 1.05 per cent, while on longer-term deposits such as notice accounts and fixed-rate bonds, you could earn 2.99 per cent and an average of 2.77 per cent on cash Isas.
By January 2016, they had fallen to 0.7 per cent, 1.6 per cent and 1.3 per cent respectively.
Since then they have fallen even further, with the average rate paid on a cash Isa down a third to 0.9 per cent.
Easy-access rates have fallen to 0.4 per cent and longer-term deposits to 1.1 per cent.
In the first nine months of last year the amount of money in savings with banks and building societies rose by 5.6 per cent to ￡1,105 billion, Bank of England figures show.
This year it has limped up just below 1 per cent to ￡1,119 billion from ￡1,108 billion in January.
Economists say the dramatic plunge in savings levels is due to years of record-low interest rates, sluggish wage growth and the return of the culture of putting spending first
The nosedive in the amount going into savings has led the government-run National Savings & Investments (NS&I) to cut the amount of money it expects in from savers.
Last week, it almost halved its expected deposits down from ￡13 billion (allowing for any figure between ￡10 billion and ￡16 billion), announced earlier this year, to just ￡8 billion (￡5 billion to ￡11 billion).
In the first half of its financial year, which started in April, it attracted ￡3.4 billion of new money. That was substantially less than half of its ￡11.8 billion total take for the year, suggesting savers put less and less into its accounts as time went on.
Early evidence of the effect of this month’s 0.25 percentage point rise in the base rate to 0.5 per cent reveals the big banking providers — Halifax, Santander, NatWest, RBS, Barclays, Lloyds and HSBC — are reluctant to pass it on to all their savers.
NS&I, however, has passed on the full 0.25 per cent?from the start of next month to encourage more deposits from savers who have all but given up on getting a return for their investments.
FAMILIES WHO WANT JAM TODAY
The only way to stem the plunge in savings is rising incomes, better returns and a change in attitudes among families who are once again piling on debt.
Money Mail has previously revealed how Britain is returning to the spend-spend-spend culture that became the norm before the 2008 financial crisis.
In July, we reported on the middle-class families sitting on a debt timebomb. Collectively we owe ￡204 billion on unsecured debts on credit cards, car finance and overdrafts — the highest amount since the banks collapsed in 2008 and up nearly 10 per cent in the last 12 months.
Hefty repayments on these deals are now eating into the amount that people can put aside, experts say.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says: ‘Consumers seem to have slashed their saving rate again to fund more spending. This cannot continue.’
Pablo Shah, economist at Centre for Economics and Business Research, says: ‘This month’s base rate rise may go some way to promoting a savings culture. We expect the rise in earnings to outstrip inflation next year.
‘This boost in incomes would help prevent further falls in the household savings ratio.’
Yael Selfin, chief economist at KPMG UK, says: ‘People are saving less with banks and building societies and looking to shares and property.’
A spokesman for the Office for Budget Responsibility says that it expects the savings ratio to ‘stabilise’ in 2020 if consumer spending growth slows and incomes grow more quickly, so the two meet at the same level.
WHERE IT PAYS TO SAVE
Your first step is to cut your spending and pay off your expensive credit card debts.
Once you are debt-free, set up a regular savings plan with a direct debit to leave your current account just after you are paid.
Check out what your current account provider offers. For example, HSBC and its offshoots First Direct and M&S Bank offer their top regular savings plans paying 5 pc to current account customers.
With First Direct, its 1st Account holders can save between ￡25 and ￡300 a month. At ￡300 a month you’ll have ￡3,697.50 after 12 months, or ￡1,232.50 if you save ￡100 a month.
HSBC and M&S Bank customers can put in between ￡25 and ￡250 a month. With all three you can change the amount you put in each month but can’t withdraw cash or miss payments.
Another good deal is Virgin Money’s Regular Saver — available online or in-branch — effectively an easy-access account with a rate of 2.25 per cent fixed on between ￡1 and ￡250 a month. You can take money out, miss payments and still earn 2.25 per cent.
Saffron BS pays a higher 3.5 per cent fixed for 12 months on between ￡10 and ￡200 a month and allows withdrawals, but it is only available through its limited branch network.
Watch out for what happens after the first 12 months. Some move your money into a poor-paying easy-access account, so switch to a better deal and open another plan for your new savings.
You only earn interest once your monthly payments hit your account. Your first payment earns 12 months’ interest — so you’ll see ￡5 for the year on your first ￡100 saving at 5 per cent.?
The second ￡100 earns interest for 11 months — or ￡4.60 and so on. Your final ￡100, in the account for one month, earns just 42p.
For a deposit for your first home, go for a Help to Buy Isa or, if you are aged between 18 and 40, a Lifetime Isa monthly savings plan to earn the generous 25 per cent bonus on your savings from the Government.
With a Help to Buy Isa the most you can put in is ￡200 a month — or ￡1,200 a year — with no limit on how long you can save for.
The maximum bonus is ￡3,000 on the first ￡12,000, giving you ￡15,000. The minimum bonus is ￡400, so you need to save ￡1,600 to get one at all. It is paid out when you buy your home rather than when you put down the deposit.
You can kick-start your plan with a ￡1,000 lump sum.
With a Lifetime Isa you get the 25 per cent bonus, too, but you can put in more — ￡4,000 — each year. You can use your savings towards your first home as long as the plan has been running for at least a year.
Money in a Lifetime Isa can be used on properties worth up to ￡450,000, while Help to Buy Isa is restricted to properties worth less than ￡250,000 — or ￡450,000 in London.
Among the top deals for Help to Buy Isas is Virgin Money at 2.25 per cent. Only Skipton BS offers the cash version of a Lifetime Isa and pays 0.25 per cent.
THIS IS MONEY'S FIVE OF THE BEST CREDIT CARDS
Barclaycard's Platinum Extended Balance Transfer card gives 38 months of 0% interest on balance transfers for a 1.4% handling fee if made within the first 60 days. Make sure to clear the balance before interest shoots up to 19.9% APR
Sainsbury's Bank's Nectar Credit Card offers 32 months 0% interest on purchases. Shoppers earn 1,000 bonus Nectar points per ￡35 supermarket spend (up to 10,000) in the first two months. 18.9% APR
The Lloyds Bank Platinum Credit Card charges 5.7% APR - the lowest interest rates available. The no-frills card also comes with no handling fees on balance transfers.
The Amex BA Premium Plus Credit Card offers 25,000 Avios if you spend ￡3,000 in the first 3 months. Plus a ￡10,000 annual spend get you a free companion ticket. The card comes with an annual fee of ￡195 per year. 76.9% APR
M&S Bank's Reward Plus Credit Card gives a ￡20 voucher when you sign up plus double reward points on spending for the first year. You also get 6 months 0% interest on purchases and balance transfers (2.9% transfer fee). 18.9% APR
BOOST AN OLD NEST EGG
If you have already built up a lump sum, make sure you earn as much interest on it as possible.
Don’t leave it in an account with a big bank as these pay a pittance. HSBC pays just 0.05 per cent on its easy-access Flexible Isa and Halifax Everyday Saver just 0.2 per cent.
Instead switch to a provider where you can earn as much as 1.3 per cent (see table).
When your fixed-rate deal comes to an end, move to a better deal. The top one-year rate is 1.95 per cent from Atom Bank.?
But Halifax pays just 0.45 per cent for one year, Lloyds 0.4 per cent, HSBC and NatWest 0.5 per cent, Barclays 0.55 per cent and Santander 0.5 per cent or a slightly higher 0.7 per cent for its loyal 123 customers.
THIS IS MONEY'S FIVE OF THE BEST SAVINGS DEALS
Tesco Bank pays 1.2% AER variable interest on its easy-access offering. (Rate due to increase from December 6 to 1.35%). The account can be opened with just ￡1. Rate drops to 0.8 per cent after 12 months
Atom Bank pays a best-buy 1.95% AER on its one-year fixed term deposit account. The account is operated online or via its smartphone app.Minimum deposit is ￡50.
RCI Bank pays 1.3% AER variable interest on its easy access deal. Deposits in its Freedom Savings Account have no FSCS protection, but you are covered for up to €100,000 by the French equivalent (FGDR).
Masthaven pays 1.85% AER fixed interest if you lock your cash away for 18 months. Alternatively savers can set their own fixed-rate term themselves. It requires a minimum ￡500 deposit and you can choose to receive interest monthly or annually
Chartered Savings Bank pays a best-buy rate of 1.36% AER on its fixed one-year cash Isa. The account allows transfers in and has a minimum deposit of ￡1,000.
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