Who Stole Our Savings Habit?
There was a time when we Brits would save a seventh of our take-home pay. Today, the savings habit is nearly dead.
Once upon a time, we Brits were serious savers. Indeed, the financial hardship which began in the 1930s continued long after World War II ended in 1945. Hence, while post-war Britain was being rebuilt, our parents and grandparents desperately tried to stock up their savings accounts. However, it took until the mid-Fifties before they started to make real progress.
Sadly, the good financial habits of the past have not been passed on to the current generation. Indeed, the savings ratio (which measures how much of our take-home income we save) has collapsed to a fraction of its former highs. Take a look at the following table, which shows how the savings ratio has varied since the war:
The UK savings ratio from 1945 to 1989
Period | Low (%) | High (%) |
|---|---|---|
1945-49 | -3.3 | 0.0 |
1950-59 | -2.1 | 1.9 |
1960-69 | 4.1 | 7.2 |
1970-79 | 5.0 | 10.9 |
1980-89 | 4.9 | 12.4 |
As you can see, we struggled to save during the Forties and Fifties, but our savings habit improved from the swinging Sixties onwards. Indeed, in 1980, we saved almost an eighth (12.4%) of our take-home pay. During the difficult years of 1979-82, the savings ratio never dropped below 10.9%, or almost one pound in every nine.
The peak came in the difficult winter of 1979, when the savings ratio hit an all-time high of 14.1%, or one in seven pounds. The early Thatcher years were a difficult time for the economy, which caused people to squirrel away a lot more money in order to cope with turbulent times. Now let's look at how well we saved in the Nineties:
The UK savings ratio, 1990-99
Year | Savings ratio (%) |
|---|---|
1990 | 8.0 |
1991 | 10.3 |
1992 | 11.7 |
1993 | 10.7 |
1994 | 9.3 |
1995 | 10.2 |
1996 | 9.4 |
1997 | 9.5 |
1998 | 7.0 |
1999 | 5.3 |
Although we saved hard during the recession of the early Nineties, our savings habit started to slip as the housing market took off from 1995 onwards. However, things have got a lot worse recently, as my final table shows:
The UK savings ratio, 2000-2008
Year | Savings ratio (%) |
|---|---|
2000 | 5.1 |
2001 | 6.4 |
2002 | 5.0 |
2003 | 4.9 |
2004 | 3.7 |
2005 | 5.6 |
2006 | 4.8 |
2007 | 3.1 |
Now brace yourself for some really bad news. In the first quarter of this year, the savings ratio collapsed to 1.1%. In other words, between January and March, we managed to save a pathetic £1 for every £90 of take-home pay. This is the lowest savings ratio since 1959, which takes us to a 49-year low.
In summary, our instinct to save is now at its lowest level in almost half a century. In the past, a squeeze on our disposable incomes would cause us to cut back and save more. Sadly, after a twelve-year housing and credit boom, we've almost forgotten how to save. Alas, without a decent cash cushion to tide us over the hard times, the outlook for British households looks pretty poor.
So, my advice to you is to start saving as hard as you can. Get into the habit of putting away a set amount each month in a high-interest, preferably tax-free, savings account. Then, if the UK does go into recession, at least your household finances will be in better shape.
More: Bag a superior savings account today! | Sensational Savings For Summer Savers | Five Steps To Smarter Saving
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I'm just wondering if proof of ID and address is an obstacle for many people who might otherwise open a savings account. (If nearly everyone has an account but doesn't put much in, then obviously that's not the case.)
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McLeodC - you say that the government should ignore savings for the first six months of any period of unemployment. My understanding is that there are two types of Job Seekers allowance - contribution-based and income based. The latter is affected by the level of savings a person has, the former isn't. Providing a persion has made enough NI contributions in the past then they should be entitled to contributions-based Jobseekers allowance for the first six months that they are unemployed, and therefore their savings are not taken into account for that period.
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A major disincentive to saving, for anyone who is concerned about losing their job, is imposed by the Department of Work and Pensions. If you have savings (and investments) over £6,000, you'll get paid less JobSeeker's Allowance. If you have savings over £16,000 you probably won't qualify at all. Similar rules apply to claimants for Income Support and Housing Benefit. These paltry savings limits have barely changed in many years. They were no doubt intended to prevent layabout millionaires from claiming social security benefits, but the result is that people in insecure jobs are discouraged from saving at the time when they need to have a savings cushion most. [br/]The government should raise the savings limits to at least £50K to restore them to the real value at the time when they were introduced, or could consider alternative approaches, such as disregarding savings entirely for, say, the first 6 months of any period of unemloyment. [br/]Perhaps the large numbers of MPs concerned about losing their jobs after the next election should push for such a change?
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02 July 2008