UK personal savings hit £1.5tn ($2tn) for the first time at the end of December, as COVID-19 lockdowns triggered a boom in savings.
Money saved through reduced spending on holidays, commuting and dining out has allowed UK savers to add £98bn – 7% – to their bank accounts and cash ISAs since March 2020, according to data from financial adviser Salisbury House Wealth.
“A sharp drop in spending has created a savings windfall,” Tim Holmes, managing director at Salisbury House Wealth said.
“Shocks to the economy often cause people to cut discretionary spending and build up cash.
“This time around, that build in cash has been put on steroids by the physical closure of a large part of the leisure and retail sector.”
However, bank accounts offering negative real returns, savers should consider moving some of that cash into “better-performing long-term investments,” Holmes said.
“Once savers have built up a comfortable cash cushion they could find they are better off over the long-term by moving surplus cash into their pension or stocks and shares ISA.
“The alternative is to see that cash gradual get eroded away by inflation.”
Leaving too much money in bank accounts is considered a poor choice as traditional bank accounts have zero or have extremely low interest rates.
The average interest rate on savings accounts is now just 0.19%, and 0.52% for an average fixed-rate ISA.
For many people, this means their cash will be growing at a slower rate than inflation – creating negative real returns.
The expert advised that savers with a “long-term view” may want to consider investing some spare cash in equities, which have outperformed all other asset classes.
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Since 1925, UK equities have returned 12.4% a year – higher than global bonds at 6.6% and cash at 4.9% per annum.
“The coronavirus lockdown has given people a rare chance to build up a good cash buffer, but their money is often not working as hard for them as it should,” said Holmes.
“They could just spend this extra cash when the economy reopens, or they could properly invest that money and see it grow into quite a sizeable nest egg.
“The Bank of England is not expected to increase interest rates for the foreseeable future, meaning that bank accounts will gradually chew up those deposits.”
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