BLOG: Is it time to make a long-term plan for lockdown savings?
It is clear that this period created a nation of ‘accidental savers’, triggered by lockdowns vastly limiting spending opportunities by shutting down entire areas of the economy.
With restrictions now lifting, many will find themselves making a dent in their pandemic savings as there is now ample opportunity to spend money again. However, it’s clear that many of the pandemic’s savers don’t yet have a long-term plan for their spare cash.
Pandemic savings earning little return
An enormous amount of pandemic savings are still sitting in current accounts, receiving no interest at all, or in low-paying easy access accounts. Many of those will be linked to current accounts and offer a rate of 0.1% or even less.
Easy access balances have continued to grow at a rapid pace since we first went into lockdown in March 2020. As of the end of May 2021, they accounted for a record 60.1% of the total savings market – while most other savings categories have lost market share over the course of the same period.
Indeed, savings balances recorded on the CACI database, which records data from more than 30 savings providers including the biggest banks, shows that the easy access non-ISA market has grown by £80bn since the pandemic began in March 2020, an increase of 14%.
Prior to the pandemic, the easy access market had remained fairly steady, increasing by less than a single percentage point between March 2019 and March 2020. The non-interest bearing market, which is mostly made of current account balances, experienced an even more staggering pace of growth, seeing an increase of just over 30% between March 2020 and June 2021.
The predominant trend here seems to be that most pandemic savers are receiving either no interest on their savings, or a rate that’s way lower than average. Despite rates moving upwards over recent weeks, nearly three quarters of instant access balances (72%) received a rate of 0.1% or less. This is despite the average easy access interest rate now standing at 0.18%, according to Moneyfacts’ most recent Treasury Report.
So, what is driving this trend? It is evident savers aren’t currently looking for the most competitive rate available. Many people will have given in to inertia due to rates being low across the market, or are unsure what their long-term financial plans are so are opting to keep the money somewhere where it’s easily accessible.
Find a better deal – then make a plan
My first suggestion for savers is to shop around for a competitive easy access product to ensure that their savings are at least offering some return, while they work out their more long-term financial goals. With the vast majority of savings currently receiving a fraction of the best-buy rates available, people could be doubling or even tripling their return by finding a more competitive deal.
The second step is to sit down and work out a budgeting plan. Savers will need to decide how much of their money they want to spend, and how much they want to save for the short-term and long-term. Based on their goals, they can then decide the most suitable account. For example, emergency fund savings are best suited to an easy or defined access product, while long-term savings will receive the most competitive return in a fixed rate.
Whichever option savers choose, there is one rule of thumb to stick to: move any savings out of current accounts if you aren’t earning any interest. As we come out of lockdown and many of us find our spending goes up, having lockdown savings in a separate account will also help you budget more effectively.
Derek Sprawling is savings director at Paragon Bank