In the UK today, £729bn of the nation’s savings is sitting in cash. That is half of our total financial wealth. What is more, a mind-boggling one quarter of that total wealth is idling in instant access accounts, currently earning less than 0.4 per cent a year.
With rates that low, you would think people would switch regularly, but 85 per cent of instant access savers have not done so in the last three years. Moreover, on £334bn of cash, savers admit they have no idea what the interest rate is at all. The banks and building societies call this “muppet money”; they are paying an average interest rate of less than 1 per cent on the full range of deposit accounts, according to calculations we have done at Henderson. That means our cash savings of £729bn are earning a miserly annual income of £7bn.
Policy is partly to blame. QE, Funding for Lending, and Help to Buy have all ensured that banks have plentiful supplies of cheap capital to fund their operations, squeezing out demand for deposits. In the face of such disdain for our funds, you would think we would look elsewhere for better alternatives. Even 10-year gilts at their historically low yields would offer significantly higher, guaranteed returns, if held to maturity, than cash. Yet we consistently opt for cash, in the face of all the evidence that it is letting us down.
Some level of cash savings is important. It makes sense to keep around three months’ income available as a buffer. But even if every household put as much as four months’ income by, that would still leave £466bn currently sitting in cash that should be working harder for its owners.
According to Henderson Global Investors analysis, if long-term savers put that in a mix of British and international equities, it would earn them £14.7bn in income at current yields, and they would sacrifice just £4.5bn in interest income in the process. Of course savers would be taking more risk with their capital, yet history shows that a long-term approach to investment can mitigate these risks and, though not guaranteed, it can provide the possibility of capital growth. For a nation so out of love with our banks, we are still enamoured enough to forgo over £10bn a year in income – that’s about £386 per household per year, or 2.5p off income tax. Imagine the smile on the chancellor’s face if he could show equivalent largesse just before an election.
Of course, this wealth is not evenly distributed. In fact, more than half of us do not meet the three months’ income savings threshold, and a third have no savings at all. Meanwhile, just over a fifth of households have net financial wealth of more than £50,000. But that actually means our calculations are conservative. Wealthier individuals have even more cash than they need to meet short-term demands.
As the financial year draws to a close, it’s high time savers woke up to the paltry returns they are earning and did something about it. There are plenty of options, and for those with less experience, plenty of good advisers to help. A gradual process of switching into assets offering a much better income, and considering those with the possibility of capital growth over the longer term as well, could go a long way to increasing prosperity in this country. We should be muppets no more.
James de Sausmarez