Shocking figures show largest
fall in long-term savings since 1970s

by Dr. Ros Altmann

(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)

---

Short-sighted policy encouraging
spending now instead of saving for tomorrow is dangerous for all of
us

Chancellor should recognise
importance of savers for long-term growth in his Autumn Statement

People taking money out of
long-term savings:
Analysis of Bank of England figures, showing £23bn has been taken
out of long-term savings in the past year, is truly troubling. Cash
and instant access account holdings have risen sharply, suggesting
people have decided to spend their money now, rather than save for
the future. This is the sharpest decline in long-term saving since
the crisis years of the 1970s.

Funding for Lending has caused
sharp drop in rates as banks don’t need savers money: With
interest rates having fallen so low, it is indeed not so surprising
to see savers giving up on long-term saving, however that is
dangerous for all of us. The Bank of England’s Funding for Lending
scheme started in July 2012 and caused a sharp drop in savings rates,
as banks no longer needed savers’ money because the Bank of England
was supplying them will billions of pounds of almost free money.

Savers losing money in real
terms month after month as rates stay below inflation: Every
economy needs people to be saving for their own future, rather than
relying on others if things go wrong. However, in the current policy
environment, people are losing money in real terms on their savings
accounts month after month, as interest rates have fallen behind
inflation, which sends the clear signal that the authorities do not
value savers.

Economy is growing, but Bank of
England keeps rates low, so savers have given up: Normally,
as growth picks up, interest rates would be rising. However, despite
the economic rebound, with consumer spending powering ahead and
rising mortgage lending and house prices, the Bank of England insists
that interest rates will stay near zero for the next couple of years
at least. Hardly a surprise that savers are just giving up on the
prospect of a fair return on their money.

Short-sighted policy driven more
by politics but bad economics: This
short-sighted policy may be good politics but it is very bad
economics. No economy can thrive in the long run without people
saving and investing for the future. If you just withdraw money to
spend today, then growth in future will be lower.

Repeating mistakes that led to
the crisis – growth based on consumption, borrowing and house price
boom: The economic
meltdown from which we are now recovering was caused by excess debt,
house price inflation and unsustainable borrowing. We seem to be
repeating the same mistakes again, rather than learning the lessons
of history and encouraging more responsible long-term attitudes.

Policy has destroyed incentives
to save: Measures are
urgently needed to restore credibility to David Cameron’s
pre-election pronouncement that “We
need to make a really big change: from an economy built on debt to an
economy built on savings.” Sadly, so far, his Government’s
policies have destroyed the incentive to save.

Autumn Statement should address
problems of savers: I
would urge the Chancellor to
use his Autumn Statement as an opportunity to recognise the damage
done to savers and introduce some measures to improve their position.
The following measures would be a good start:

1. Increase ISA allowances
   so that savers can at least earn more of their meagre savings income
   tax free. This is the equivalent of a rise in interest rates.
   There are rumours that the chancellor is thinking of capping ISA
   savings, that would be totally the wrong policy decision.

2. Introduce a special extra ISA
   allowance for people to use to save for long-term care
   spending, this money being tax free if spent on care for themselves
   of a loved one

3. Relax restrictions on ISAs
   so that people can choose whether to hold cash or stocks and shares
   and move freely between the two and also allow Child Trust Funds to
   be switched into Junior ISAs

4. Reform the annuity markets so
   that people can get much better value for their long-term pension
   savings

5. Incentivise financial advice in
   the workplace to help
   people plan their finances – the current tax relief on financial
   advice is only £150 per worker, and only covers pension advice, not
   advice for other long-term savings. This is far too low to deliver
   meaningful advice

ENDS
Dr. Ros Altmann
4 December 2013