A recent study we undertook showed that the amount in UK personal bank accounts hit £1.5 trillion for the first time at the end of 2020 as the lockdown triggered a boom in savings.
Money saved through reduced spending on holidays, commuting and dining out has allowed UK savers to add £98 billion to their bank accounts and cash ISAs, marking a 7% increase between March and December 2020.
The sharp drop in spending caused by Covid-19 restrictions has created a savings windfall for many.
Shocks to the economy often cause people to cut discretionary spending and build up cash. This time around, the closure of large parts of the retail, leisure and hospitality sectors has accelerated this process.
ONS data shows that the average household spends £51.30 a week on eating out at restaurants and £41.30 on package holidays. This was restricted during lockdown, due to the closure of the hospitality sector and travel bans.
With bank accounts offering negative real returns, savers should review whether these excess savings can be deployed more effectively elsewhere.
The alternative is to see that cash gradual get eroded away by inflation.
Leaving too much money in bank accounts may be a poor choice as traditional bank accounts have zero or have extremely low interest rates, with average interest rates on savings accounts 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.
Savers with a long-term view may want to consider investing some spare cash in equities which have outperformed all other asset classes. Since 1925, UK equities have returned 12.4% a year, higher than global bonds at 6.6% and cash at 4.9%.
The coronavirus lockdown has given many people a rare chance to build up a good cash buffer but their money is often not working as hard as it should for them. Although people may be tempted to spend
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.
Speak to us to find out more.