Debt – just one unwelcome legacy of the pandemic crisis will be the huge amounts of money owed by the government, businesses and some households. It has led to suggestions that we might see a change in the nation’s financial mindset, as people realise that they need to have more savings to fall back on if their income gets hit.
Whether they achieve that remains to be seen, but the fact is that 12.8 million UK households have less than £1,500 in cash savings; at the same time, personal debt has risen by nearly £49 billion in the last year – or £923 per person.¹ Unfortunately, the current crisis will only add to that worrying statistic.
Of course, the government has the advantage of being able to enlist the Bank of England to help keep its borrowing costs down. Financial repression – deliberately holding interest rates below inflation – means the government can borrow interest-free in real terms. But while that will help ease the government’s debt pile in the years to come, it will only extend the pain for cash savers, who are suffering record low interest rates and are seeing the spending power of their money fall.
“The problem for cash savers has been compounded by the government’s latest Term Funding Scheme, which allows banks and building societies to borrow money cheaply, negating the need to compete for savers’ deposits,” said Andrew Shaw, Head of Investment Communications at St. James’s Place. “It’s a repeat of what happened in 2012 following the launch of the Funding for Lending Scheme.”
The impact is already being felt. Over 180 savings products have been withdrawn in the last month: the average easy access rate is now only 0.44% – down from 0.64% this time last year; and a number of leading high street banks are now paying just 0.01% on deposits of £10,000.²
The bedrock of a sound financial plan is to have sufficient emergency funds available in cash. That might mean having enough to meet 3–6 months’ worth of outgoings. If you’re in or approaching retirement, you may well need more than that. The rule of thumb is: ensure you have whatever amount allows you to sleep more easily.