Britain’s cash savings could reach £1 trillion by 2012

Britain’s savings have nearly doubled since the turn of the Millennium, with balances up £426 billion – five times the increase in unsecured borrowing (£79 billion). This trend is likely to continue according to Alliance & Leicester Savings, with over a third (39%) planning to increase their savings balances over the next five years.

Ewan Edwards, Head of Savings at Alliance & Leicester comments: “If current growth continues, then in the next five years personal cash savings could grow to around £1 trillion.

“We are also seeing big changes in the types of accounts favoured. Five years from now Britain’s savvy savers are likely to have over a third of their cash savings in tax efficient accounts such as ISAs – a massive increase from five years ago, when just a seventh (14%) were sheltered from the tax man in this way.”

Only 2% of people think saving is unnecessary and that one should ‘live for the day’. In contrast, 39% of people feel saving is necessary for their financial future – very encouragingly, the under 35’s believe this most strongly.

But worryingly, one in four people (24%) have no savings at all, with three quarters of them (75%) saying the main reason for not having any cash savings is lack of spare income. One in eight (12%) feel they lack the discipline to save.

Professor Merlin Stone of Bristol Business School added: “Today, we have a savings paradox. Households appear to be stretching themselves to meet increased taxation and a general rise in the cost of living. However, perhaps surprisingly, overall savings balances have continued to increase. It seems that the pressure has fallen on pension contributions. Evidence suggests that people in their prime years are saving more cash with a view to funding their retirement.”

The Alliance & Leicester report, ‘The Changing Face of the Savings Market’, has found that there have been big changes in the ways in which people save – driven by factors such as the growth in internet usage and price comparison websites.

Instant Access accounts have grown in popularity – more than half of the nation’s cash savings are in this type of account now with the average account balance up 60% to over £5,000.

Cash ISA balances have more than doubled in the same period (up 124%), now accounting for a fifth (21%) of all cash savings.

In contrast, balances in Notice Accounts have fallen by 50% and these now make up just 8% of the market, compared to nearly a quarter (23%) five years ago.

Another new trend is the development of ‘Disciplined’ savings accounts – many savers dip into their savings, so the aim of these accounts is to discourage ‘dipping’ - but at the same time allow instant access, should funds be required in an emergency. Alliance & Leicester research shows that nearly one in five (18%) dip into their savings but never put the money back.

Regular Savings accounts also encourage disciplined saving, as a set amount is saved each month over a set period of time. Although they make up just 2% of the savings market in terms of balances, the number of accounts has grown considerably.

Ewan Edwards, Head of Savings at Alliance & Leicester continues: “We expect many of the trends over the last few years to continue with overall savings balances rising and further growth in tax efficient savings such as ISAs, Instant Access accounts and different types of ‘disciplined’ savings.”

Tax Efficient savings will continue to grow and are likely to comprise over a third (35%) of all savings by 2012.

The next few years are likely to see the death of the Notice Account with virtually no new accounts being opened and balances falling dramatically. These balances are likely to be increasingly invested in better value Instant Access accounts.

The growth of ‘Disciplined’ accounts looks set to continue, as does the growth of Regular Savings Accounts.

The Internet will carry on making a big difference, with 40% of cash savings managed online – four times the amount five years ago. Internetcomparison sites are likely to grow in influence, making it easier for people to shop around to get the best rates.

Ewan Edwards concludes: “This Alliance & Leicester report shows that consumers’ savings needs are evolving. Over the last five years new savings products have become available to meet these needs, particularly variations within the instant access category, such as ‘disciplined’ savings accounts.

“When choosing the right account for their money, we know savers use a number of information sources, such best buy tables and the internet. We expect these will also have to evolve to reflect the changing savings market, empowering savers to make informed decisions of their own.”