Savings in the time of Covid - using them wisely
Well into lockdown number three, the statistics show that many of us are saving more money than ever. But with rates as low as they have ever been, there are issues with how we best use the spare cash.
Figures from the Bank of England, out last week1 , indicate that we put £20.9 billion pounds into our savings accounts in December, up from £18.4 billion the year before. That’s far more than in the preceding months, perhaps reflecting lower-than-usual Christmas expenditure this year.
The figures also show, though, that we are tucking our money away at lower rates than ever before. The effective interest rate on new deposits that we’re putting into our bank accounts fell by eight basis points in December, to a new low of 0.42 per cent.
With inflation at 0.6 per cent, this means that much of the money we are putting in the bank is currently losing value in real terms, and indications are that rates could go even lower. The Bank of England also told lenders to prepare for negative interest rates last week, a situation that could see savers actually being charged to keep their money in the bank.
The low rates/high savings conundrum
In uncertain times like these, prudent households who want to remain financially stable are faced with a conundrum.
On the plus side, many of us are saving more than ever, with expenditure lower because of a lack of commuting and leisure spend, but on the minus side the future looks uncertain and many of us want to prepare for this.
But the money, in many cases, is not needed now. Separate Bank of England figures2 show that it is mainly the wealthier section of society whose savings have risen, with over 40 per cent of high-income households increasing their savings, compared with a third of middle-income homes and under a quarter of those on low incomes.
Most of these households are not planning to spend the money now, with the same Bank of England study showing that only 10 per cent of those who had increased their savings were planning to spend them. Two thirds were planning to keep the cash in the bank, while others planned to use their savings to pay off debts, invest, or top up their pensions.
With interest rates falling near to nought, our Covid savings could look far less impressive in a few years time. In ten years time, with inflation at 0.6 per cent, £100,000 of savings that do not attract interest are worth just over £94,000 - scarcely much of a reward for squirrelling cash away.
Making the most of it
For those who do not need these savings in the near future, there are ways to make the money work harder. We are nearing the end of the current tax year, so making contributions into your pension is one way to use extra savings and gain valuable tax relief on top. Most of us (except very high earners) can pay up to £40,000 a year into our pension and gain tax relief, and the allowance resets every year, so this may be one way to make the most of corona savings.
To get a higher interest rate on your savings if you do want to keep them in the bank, you might want to consider locking money away for several years if it is not needed - however, with rates as they currently are, even this will not result in very high returns.
This is where investment comes in. While the value of money you invest can go down as well as up, historic analyses, including the Barclays Equity Gilt Study, suggest that in most cases money invested can help your savings to out run inflation.
A financial adviser should be able to help you to come up with a portfolio of investments that matches your risk appetite as well as taking advantage of tax breaks including pensions and ISAs. This could help your corona savings to be a far more effective force for your wellbeing in coming years.
1. https://edu.bankofengland.co.uk/statistics/money-and-credit/2020/december-2020
2. https://www.bankofengland.co.uk/bank-overground/2020/how-has-covid-affected-household-savings