Accidental savers

Figures for the entire economy conceal a great deal of variation in terms of the impact COVID-19 has had on household finances. Whilst millions of people have undoubtedly suffered considerably, a significant minority have found their financial position strengthened, with income largely unchanged and spending reduced.

The net effect has been to create a group of 6.4 million ‘accidental savers’, according to a new report[1]. With little active choice, this group – unlike the many who have suffered economically during the pandemic has seen bank balances increase and debts such as credit card balances reduce.

With regard to the characteristics of the ‘accidental savers’, the figures show that there is little difference between the sexes – women are almost as likely as men to find that they are able to save more as a result of COVID-19.

However, there are marked differences according to age, with an almost linear relationship between age and the extent to which you have become an accidental saver. Nearly 1 in 3 employees under the age of 25 is now in a position to save more compared with only around 1 in 5 in the 55-64 age group.

Across the UK, the household savings ratio reached 29.1% in the second quarter of 2020. Put simply, that means the UK population didn’t spend £29.10 of every £100 they earned[2].

The report suggested the money saved could be put to good use by cutting existing debts, putting money aside in a rainy day fund for unforeseen emergency bills, or put into longer-term savings pots such as pensions.

The Bank of England’s own estimates show that in the period March to November 2020 alone, households accumulated £125 billion more in savings than would have been expected, with more likely since then[3].

If saving is your main goal, there are several ways to do this. You could always opt for a standard savings account, but with interest rates currently low, an Individual Savings Account (ISA) could be a better option. In the 2021/22 tax year you have a £20,000 tax-efficient ISA allowance to use by 5 April 2022.

If you plan to save with a Cash ISA, set up a reminder for when the introductory rate ends and shop around. You can use them to save cash or invest in stocks and shares. Your entire allowance of £20,000 can be allocated into a Stocks and Shares ISA, or into a Cash ISA or any combination of both.

You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from your investments are free of Capital Gains Tax.

Another option is to consider is an investment fund. This is where your money is pooled together with lots of other individuals. The fund manager invests your money in a wide range of assets, for example, UK shares, overseas shares, bonds , etc. If you’re willing to take a high-risk approach, you could also manage your own portfolio of investments in stocks or bonds.

Investment funds provide diversification for any investor, invest in a fund and instantly access many individual stocks and bonds. They are also professionally managed and have low entry requirements, making it easier for investors to take advantage of them.

There are many other benefits of investing in funds, including their transparency, liquidity, and audited track records.

Debt in any form can be overwhelming and be a serious threat to your financial security because it keeps you from making the most of your money. What you spend on debt payments could be put away for a rainy day or used during your retirement. Once you become debt free, you’ll have more room in your budget to work on becoming financially secure.

Paying off borrowings as quickly as possible will save you money in interest but also help keep your credit in good shape. It’s important to note that your individual debt repayment strategy will vary based on what type of debt you have.

When you have debt, it can feel like your life’s on hold. Your life dreams seem impossible to pursue when your financial life is in disorder. But debt isn’t always a problem and most people will have some form of it, whether that’s a mortgage on their property, a credit card or an overdraft on their current account. If treated with care, debt can be useful.

When you have a mortgage, you don’t own your home, the bank does. If you’ve got surplus savings, it might be a good idea to use them to reduce the balance on your mortgage within the limits set by your lender.

Doing this could save you hundreds or even thousands of pounds in interest. Just beware, some mortgage lenders charge a penalty for you to do this, so check your documents or ask first. It’s worth comparing how much interest you’ll pay on your mortgage to the end of its term versus any penalty for making a larger one-off payment.

However, using your savings to overpay your mortgage may not be a good idea if you don’t have other savings to fall back on in an emergency and/or you have other non-mortgage debts.

The first thing to do is calculate your desired retirement income. How much will you need to live comfortably? In working out your target income, you may want to assume your needs and spending will stay roughly the same. In reality, that won’t be the case. You’ll more than likely want to indulge yourself now and then, and will continue to face one-off expenses.

To work out how much you need to save, you need an idea of how long your retirement could last. This means estimating your retirement age and how long you will live. There is an annual allowance (how much you can pay into your pension each year) and a Lifetime Allowance (how much you can pay into your pension in your lifetime) that both limit the amount you can save into pensions and still receive tax relief.

One of the biggest advantages of pension saving is that you can pay into a pension to reduce tax. All the money you pay into a pension qualifies for tax relief, which provides an instant boost to your savings and helps the fund to grow faster than other types of investment.

When we reach retirement, it can feel more important than ever to get those remaining items ticked off our bucket list while we’re healthy and able to. The majority of people see retirement as an opportunity to fulfil all the dreams they’ve held for years and years, but haven’t had time to carry out.

You may not have an official retirement bucket list written down – most of us probably don’t – but you may have a few places in mind that you’d still love to visit, experiences you haven’t had yet, and ambitions you would like to say that you’ve achieved.

Whether you’re on the brink of retirement or have already been retired a few years, taking a moment to draw up a bucket list can be a great way to help identify new interests and passions

Discover the difference professional advice can make. We provide a range of services all focused on helping meet your long-term needs. To find out more please speak to us for more information.

[1] Lane Clark & Peacock LLP – Britain’s army of ‘accidental savers’ – who are they and what are they doing with their windfall? February 2021

[2] Research of 2,000 UK employees working in organisations with over 1,000 employees, conducted on behalf of Aviva by Quadrangle conducted in February 2020, and repeated in August 2020

[3] Bank of England Monetary Policy Report February 2021