The pandemic has brought huge financial challenges for many individuals and savers, but it has also dramatically boosted savings in the UK.
The savings ratio, often cited as worryingly low over the past decade, has soared and some advisers are adapting their advice accordingly.
Households collectively saved around £17.5bn ($24bn, €20bn) a month in the first lockdown, a similar sum in the second and it seems very likely they are doing so again.
The savings ratio hit 29.1% in the second quarter, a record, and it is expected to be around 15% for the year. Total additional savings in 2020 were around £120bn.
So is this an opportunity to get more people investing?
‘Affluent households have extra cash’
AJ Bell senior technical consultant Rachel Vahey said: “More affluent households with steady undisturbed income streams have found they have extra cash in their pockets due to fewer opportunities to spend. What they do with this cash will vary.
“No doubt some will shore up their savings; using up Isa allowances and perhaps increasing pension contributions. And we should see evidence of this emerge in the next few months.
“However, when we get back to some sort of normality, many people will be keen to get back what they have missed; whether that’s meals out or holidays in the sun. And we will see spending soar.”
Uptick in gifting and Isa use
Meanwhile, advisers are seeing clients actively discuss using more of their allowances.
Plan Money director Peter Chadborn said: “We have experienced decumulation clients, particularly those that make ad-hoc withdrawals, saying they don’t need to make withdrawals for the time being.
“We are now noticing accumulation clients starting to ask questions of what to do with surplus capital so there are more Isa allowances getting utilised.
“I’ve also started to notice an increased interest in gifting with older generations with surplus capital keen on helping younger family members who may be struggling by paying a chunk off their mortgage, or something similar, so it is definitely a trend.”
Kay Ingram, public policy director at LEBC, says that retired clients could look at gifting.
“This may include using up lifetime gifting allowance of surplus income or £3,000 a year, which are exempt from inheritance tax (IHT) and gifting longer term investments to realise capital gains within this year’s allowance of £12,300.
“Capital taxes are likely to increase in the budget on 3 March with the chancellor widely expected to adopt proposals made by the Office of Tax Simplification to cut allowances and raise rates of capital gains tax aligned with income tax.”
Pensions savings a priority
Ingram believes that clients still accumulating assets should consider using the current pension savings allowance while marginal rate tax relief is still available, noting suggestions that the Treasury could move to a flat rate of pensions tax relief replacing the current marginal rate relief, potentially costing savers 20% to 25% more if higher or top rate taxpayers.
“In light of these potential tax changes, pension savings should be priorities for those with surplus cash.”
AJ Bell’s Vahey added: “This has been a tale of two financial experiences. And undoubtedly the young, self-employed, and those on lower incomes have borne the brunt of the financial damage inflicted by the pandemic.
“At the end of the pandemic, we will be left with a wider divide between the have and have-nots. The government will seek to close these gaps, which may mean higher taxes for wealthier households, perhaps putting the damper on their spending plans.”
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