Economists have noted British households’ propensity to accumulate ‘excess savings’ during the pandemic with a mixture of academic satisfaction and quiet admiration, writes Christine Hallett, chief executive of UK-based pension provider Options for Your Tomorrow.
A study by AA Financial Services found that 85% of British adults spent considerably less during lockdown. Monthly fuel bills fell by an average of £49; people saved £57 ($73, €68) by not venturing out to the pub or a restaurant and pocketed a further £53 by avoiding the high street and spending online instead.
On average, households found themselves more than £600 a month better off, prompting almost one third (31%) of adults to increase their level of savings.
According to wealth management firm Investec, over the course of 2021, Britain’s ‘excess savings’ soared to £185bn, up £73bn or 9% of GDP, the equivalent of £6,600 per household.
‘Excess savings’ are not a new phenomenon; economists maintain that an increase in the propensity to save is primarily a consequence of the prolonged global decline in interest rates, a theory mooted in 2005 by former US Federal Reserve chairman Ben Bernanke who identified a ‘global saving glut’ as the principal explanation for low interest rates.
A closer look at the distribution of ‘excess savings’ accumulated during the pandemic shows that they have mostly accrued to high-income households, a cohort displaying a much lower propensity to spend from income or wealth compared with their lower income counterparts.
Indeed, a survey by accounting group NMG suggests that only 10% of households whose lockdown savings increased intend spending them, whereas 70% prefer to keep their savings in bank accounts. But one-fifth plan to use their savings to top up their retirement plans, invest or reduce existing debt.
Property market
The role of property in this unfolding economic scenario cannot be ignored.
Historically, homeowners feel wealthier as property values rise, even though they may have little or no intention of selling. As house prices increase homeowners become more confident, resulting in higher levels of both investing and spending.
There’s little doubt that homeowners have emerged from the pandemic in much better shape, financially-speaking, than they were in late 2019. According to the Office for National Statistics (ONS), between January 2020 and January 2022 average house prices rose to £273,762, a 17.6% increase.
This combination of ‘excess saving’ and regular, authoritative confirmation that their homes are worth significantly more than they were pre-pandemic is a powerful incentive for people to convert a proportion of their pandemic-induced savings into longer-term investment. The motivation to invest is reinforced as we appear to be entering a prolonged period of rising inflation, interest rates, fuel costs, utility bills and various forms of local and national government taxes.
Financial advisers are mindful that many existing investors wish to use the current ‘excess saving’ opportunity to top-up an existing pension or to create a new, private pension, such as a Sipp, and thereby benefit from immediate tax relief on contributions up to a maximum of £40,000. A smaller number of investors may prefer to transfer to a different Sipp platform, but there is one additional pension-related opportunity of which a sizeable number of investors can take advantage.
Few savers regularly make full use of their annual pension contribution allowance, although the evident scale of excess savings presents them with a perfect opportunity to rectify this.
Carry forward
As a result, I am urging people that if they have not used their full annual allowance during the past three tax years, carry forward allows savers to ‘plug’ any gaps, provided they were a member of a registered pension scheme during the relevant period.
For example, someone who earned £50,000 in 2019/2020 and saved £1,200 a month into their Sipp could theoretically use their excess savings and invest up to £25,600 into their pension for the tax year ending April 2020. Such an investment would attract tax relief of £6,400. There are some conditions that must be met before such an investment can be expedited, but the carry-forward option is often overlooked by IFAs despite its obvious attractiveness.
During the first quarter of 2022, a variety of reliable surveys and reports have consistently shown that most excess savings continue to wallow in bank accounts earning peanuts.
As the new tax year dawns, therefore, this could be an ideal moment to examine possible gaps in Sipp contributions from earlier years and use a proportion of any excess savings to plug them and attract generous tax relief at the same time.
This article was written for International Adviser by Christine Hallett, chief executive of Options for Your Tomorrow.
