One of the great themes of the past fifteen months has been accidental savings, the amount people in the UK have saved by the simple expedient of not being able to go out and spend.
“Thrifty Brits stash the cash in lockdown” has been a typical headline, quickly followed by an estimate of how much cash we might have squirreled away through not going to the pub, eating out or buying new clothes. One estimate put the figure at £160bn, with the Bank of England suggesting that up to 5% of this could be spent as lockdown eases, and hence boost the UK recovery. Economists at Deutsche Bank went further, suggesting that around 10% could be spent on nights out, holidays, cars and more.
“Would I be shocked by £20bn of extra spending? No,” said economist Sanjay Raja. Spending on this scale would comfortably add between 0.5% to 1% to UK GDP. However much is actually spent will still leave a substantial amount of money that is not spent. Money that remains accidentally saved. According to Peter Flavel, the CEO of Coutts, however, we are not saving wisely.
Flavel looks at it from the point of view of an Australian who has lived and worked in several countries, and is now in the UK. He makes a simple point: the UK’s Individual Savings Account (ISA) is, “potentially the best medium-term savings product globally.” But, he argues, “they are not used very well, [in fact] they are used badly.”
As you may well know, a couple can invest £40,000 per year into ISAs. Junior ISAs have a limit of £9,000 per year. The products enjoy tax advantages and give immediate access to your cash if it is needed. Small wonder that Flavel describes the ISA as a World Champion amongst saving options.
According to recent statistics, around 20% of the UK adult population have invested in an ISA, but what concerns Flavel is that the overwhelming majority of these ISAs (76%) are held in cash, meaning that with low interest rates and inflation the real value of the ISA could actually fall over time.
We take a balanced approach to financial planning. It is often a good idea to keep some money in cash, after all none of us know when we will need access to our “emergency fund.” But Peter Flavel makes a very valid point, it is important that we do not allow a disproportionate amount of our savings to accidentally accumulate in cash. It runs the risk of unbalancing your overall financial planning portfolio, giving you a more cautious approach than you might otherwise want or need, and, with low-interest rates likely to be the norm for some time, it also risks poor returns. Of course, where that balance lies is different from one individual to the next.
If you are interested in finding your own balance then do not hesitate to get in touch with us. While “I have accidentally got too much cash” may not sound like a bad problem to have, in financial planning terms it very well could be.