The £1 Trillion Savings Mountain

We hear a lot about the debt mountain here in the UK. But we have a savings mountain too, and it could top £1 trillion in just a couple of years.

For years we've been hearing about the debt mountain here in the UK and how it has soared past the £1 trillion level. It's currently over £1.36 trillion consisting of around £1.15 trillion in mortgage debt and £215 billion of unsecured credit (personal loans, credit cards, hire purchase agreements and so on).

However, we hear far less about the total amount of savings we hold. This is has been growing rapidly too and this fact was highlighted last week in a report from Alliance & Leicester. Since the year 2000 our savings mountain has almost doubled and it currently amounts to £867 billion. If it keeps up this rate of growth it could pass the £1 trillion mark sometime in 2010. Alliance & Leicester is a little more cautious, suggesting this level won't be reached until 2012.

It's interesting to note that collectively we have four times as much in savings as we owe on credit cards and loans. This puts a different perspective on the debt crisis although obviously few people that have a significant level of savings will also have much in the way of debt. It's a shame these collective figures are not broken down into numbers of people and the level of debt and savings held. If we could see how this changed over time this would give us a much clearer picture of how healthy the nation's finances really are.

Why are we saving so much?

The increase in savings is a little bit of a mystery however. The savings ratio, which measures what percentage of our post-tax income we save, has been very low in the past several years. It's averaged around 4%, half the average level it was over the previous forty years.

So if we're saving so little from our regular income where has the increase in savings come from? Professor Merlin Stone, who helped compile the report, reckons the increased savings have been at the expense of our pensions, which people preferring the security of cash in the wake of the numerous pension scandals we've suffered.

However, the fact that we're all living longer has probably had an impact too. Elder people tend to have more in the way of savings, so the rise in the number of pensioners is likely to mean more in the way of total savings.

Where are we putting our savings?

Unsurprisingly instant access accounts are the most popular vehicle for our savings. They account for 53% of our cash, up from 47% five years ago. The average balance held per account is around £5,000 but some people have more than one account.

The biggest area of growth has been tax-free savings, mainly due to the success of cash ISAs. The percentage of our savings that we hold in these accounts has risen from 14% to 21% and will no doubt be given a further boost when the limit is raised from £3,000 to £3,600 a year from next April.

Child Trust Funds may become a significant part of the savings equation in the future but at the moment they only play a bit part, accounting for just 0.03% of our total savings. Regular savings accounts are another small player, due to the low limits they impose on monthly savings. However, the launch of accounts paying 8% to 12% in the last couple of years has helped grow their market share from 1% to 2%.

Fixed-term accounts have remained popular over the years, especially with elder savers, and they will have been boosted recently by the bumper rates that were on offer this autumn. They account for 13% of our savings.

The growth in instant access accounts and tax-free savings has been balanced by a decline in notice accounts. Rates offered on these accounts used to be the most competitive, but nowadays instant access accounts often pay better rates. This has seen notice accounts slump from 23% of our savings to just 8%. With few of these accounts being opened, it's reckoned that the decline in this form of savings will continue.

Where next for our savings?

Although the rates offered by different providers can vary enormously, it seems this is a message that is yet to get through. Sadly 44% of people open a savings account with their existing provider and don't shop around for the best rate. This is no doubt one reason why most savings accounts (62%) are still opened at a branch. Opening an account via the Internet is of course becoming increasingly popular but mainly, it would seem, at the expense of telephone and postal accounts.

The report also highlighted the rise of what it calls disciplined savings accounts, which was a new term to me. These are accounts that allow instant access but pay no interest in any month that a withdrawal is made. Apparently these are popular with younger savers who like a disincentive to withdraw their money.

In my view, this is a disincentive we could all do without. For example, take an account of this type that pays interest of 6%. If you make two withdrawals a year, not an unreasonable assumption for most people, the effective interest rate will fall 6% to 5%. This will happen even if the amount withdrawn is a small fraction of your total balance. Seeing as these accounts rarely pay more than the highest-rate instant access accounts, I advise giving them a wide berth!

More: Top Six Super Savers

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