26th October 2010

Savings in a world of volatility & cuts

The only relative certainty in today's economic environment is volatility and spending cuts. With employment uncertainty there is increasing emphasis on retraining and learning new skills to improve an employee's employment prospects.

Whilst adversity brings opportunities it is no surprise that savings are no longer on the top of everyone's priorities in the UK. In a lot of households the key priority is survival and to repay credit cards and any outstanding loans first and only then if possible looking towards savings as they are now viewed as a luxury.

Low interest rates look set to stay for the foreseeable future which is good news for home buyers but bad news for savers and the elderly.

The availability for the 7.5% cash accounts seems a distant memory with current 5 year saving rates at 4.5% per annum. So what do we do to address this fundamental issue?

With Government assistance Product providers could innovate to devise more attractive products with tax angles or investment features to encourage long term saving.

However, apart from economic issues the inherent problem in the savings gap today is a 'spend now, save later' culture with ongoing reductions in Government incentives.

This "buy today and pay tomorrow....or as far down the track as possible" approach based on easy access to credit has come to an abrupt end may take a decade of austerity to reverse. This was with little restriction attached and low cost lending available.

Introducing education programs very early on in a child's development to educate and promote a reversal "save today, buy tomorrow" culture in the UK could assist this change but needs to be reiterated through by parents, big business and not just in words alone.

Many people cannot afford to save due to unemployment, reduced take home pay, higher living costs and the ongoing burden of repaying credit cards and loans. Increasing the annual ISA allowances or allowing new investment options on Self Invested Pensions for example will have little impact on the population as a whole, as these are the tax efficient planning tools of the middle/upper classes.

Alex Morris
Independent Financial Adviser at Financial Relationships LLP
http://www.financialrelationships.co.uk

Adviser Letter of the Week, RDR