The coronavirus lockdown and recession fears have led households to save cash at a record pace.

In the first six months of 2020, savers stashed away £77bn, far more than the previous record set for a full year (£82bn in 2016), according to Janus Henderson Investment Trusts.

This takes total cash holdings to a record high of £1.5trn – the equivalent size of the UK’s mortgage debt.

But it said based on the rule of thumb that families set aide cash to cover three months’ of income, around £370bn is earmarked for contingency spending.

This means around £1.2trn isn’t needed to meet household bills and is instead languishing in poor-paying ISA, savings and current accounts earning minimal interest.

Indeed, just £5.7bn of interest has been earned in the whole of 2020, a higher figure than the previous record low of £4.6bn recorded in 2017. It’s also a steep decline from the record £33.1bn earned by savers in 2007 with cash balances two fifths smaller than today.

By the end of June 2020, interest rates averaged just 0.39%, Janus said.

As yields on equities are near record highs, this ‘savings glut’ could have amassed £38bn of income for savers – the equivalent to £1,350 for each household.

It said that despite the record cuts announced to dividends by UK companies, Link Group’s recent Dividend Monitor forecast they will pay between £56.3bn and £60.5bn.

Therefore, £1.17trn of UK equities will provide £42.3bn of income, six times more income than that capital would earn if it were idling in cash.

For those looking to save for at least five years, Janus said “looking beyond just cash holdings can reap significant benefits”.

It noted The City of London Investment Trust, which invests primarily in UK equities, recently reached a dividend yield of 6.03%. This means £1,000 invested here would provide income of £60 over the next year, around 15 times as much as a cash savings account. City of London Investment Trust holds the record of uninterrupted annual dividend increases since 1966, it added.

‘Savers squander opportunity to earn billions’

James de Sausmarez, director and head of investment trusts at Janus Henderson, said: “UK savers are squandering the opportunity to earn tens of billions of pounds extra in income on their savings. In my view, interest rates are set to stay low for a very long time, so there is no light at the end of the tunnel for cash.

“For every one of the last thirteen years, shares have provided a better income than cash. But even years of ultra-low interest rates have not deterred savers from stowing away a record amount of it. Indeed, the amount of spare cash idling unproductively in bank accounts is now, on average, equivalent to almost a whole year of household income, or the entire UK mortgage debt.

“What’s more, this cash is not evenly spread around, but instead is concentrated in the hands of wealthier households. That suggests there is even more than £1trn in cash that isn’t needed to meet contingencies and is therefore available to invest much more productively. Banks call this ‘muppet money’ because they know savers are missing out on much better opportunities elsewhere.”

Sausmarez noted that some people can be deterred by the turbulence of global stock markets – especially as we saw in the first part of the year.

“Dividend payments have also been badly affected this year, but UK companies will still pay tens of billions to their shareholders, far more than could be earned on cash. And dividend payouts will make up some of the lost ground next year; investment trusts like City of London have the advantage of being able to smooth the income they pay to shareholders too. The Trust has been able to maintain its payout through the crisis. Over the long term, investing in shares has not only provided a healthy income, but also the scope for capital gains too, protecting savings from the ravages of inflation.

“To keep things simple, we have only illustrated the point here by comparing UK savings interest rates with UK equity yields. But there is an investment trust to suit every appetite: some more focused on income, some more focused on growth, some with more international portfolios. Even those parts of the world with the lowest equity yields are providing a superior income compared to UK savings rates,” he said.

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