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Failure – Sending out the wrong message
A string of successive Governments have failed to take bold decisive action to help encourage savers – whether in ordinary bank savings accounts, in cash ISAs or in pensions – and instead tinkered at the edges. Put brutally, no transparent, cogently-argued or clear Government policy has yet emerged to incentivise saving. On the contrary, the past two decades have seen a series of savings initiatives conjured up ‘on the hoof.’
A myriad of savings schemes have been launched since 1987 including Personal Equity Plans (PEPs); Tax-Exempt Special Savings Accounts (TESSAs); Individual Savings Accounts (ISAs); Child Trust Funds; stakeholder pensions; a national-rollout of the ‘Savings Gateway’ for low-income savers; and, from 2012, personal accounts – yet another new pension scheme, this time one into which employees will be automatically enrolled.
The decline in savings
Here’s a statistic to send a shiver down your spine: Britain’s average household debt – taken as a percentage of disposable income, or spending money – is now nudging nearly 180%. That’s a lot of cash being spent that hasn’t first been banked and accounted for.
Small wonder that, over the past 10 years, UK household savings themselves have plunged from 10% of disposable income in 1997 to just 2% in 2008 – a mighty fall.
That’s not all: research by Investec Private Bank shows that nearly a third of savers have reduced the amount of money they put aside because of successive cuts in the Bank of England Base rate to just 0.5%. Some six million pensioners rely on savings interest for up to a fifth of their retirement income, yet the Government has done nothing to try and counter the impact of rock-bottom savings rates.
A lack of incentive to save
If savings interest rates rose, then a remarkable 23 million of us would put aside more of our income to save, Investec found.
Just look at the evidence: since Base rate was cut to 0.5% in March 2009, less than 4% – a pitiful one in 25 – of instant access savings accounts offer a rate of 3 per cent (gross) or more on balances of £5,000, according to research from Sainsbury Bank.
Paltry rates of return on our savings have undermined the desire to save, warns Nationwide Building Society. In July 2008, it asked a consumer panel if saving was good and some two-thirds responded ‘yes’. In July 2009, the number had slipped to just 57%.
Why debt became the new black
Savings simply haven’t had a chance, and part of the blame lies with the sexy linguistic ‘rebranding’ of debt that almost made it fashionable. The language of borrowing has become simpler and more widely understood than the fusty language of saving. Before the credit crunch, borrowing was euphemistically called ‘credit’ instead of ‘debt’ and homeowners were regularly boasted about the gargantuan size of their mortgages, as though they were a badge of honour.
It’s a sad state of affairs but, until the onset of the crunch and panicking lenders, it would have been far easier to obtain a credit card, personal loan or mortgage than to open a savings account or set up a pension.
Worst, you could easily have applied for and got a self-certified mortgage – designed for anyone without ready or steady income to apply for a home loan – with few or no credit checks. Perhaps unsurprisingly, it encouraged plenty of people to exaggerate or even lie about their take-home income and led to all sorts of financial difficulties.
And all the while, hundreds of thousands of students have been forced to take out loans to fund their studies to produce a generation of students leaving college with average debts of over £10,000, soon to rise sharply.
Asleep at the wheel
So where were the regulators and authorities during the boom, when many were borrowing way beyond their means, with barely a thought to how it would be paid back? Simple: looking elsewhere and enjoying the spoils of a debt-fuelled expanding economy. In a nutshell, the Treasury, Bank of England and the Financial Services Authority (FSA) had all taken their eye off the ball.
The Treasury last produced a report looking at savings back in 2000 (Helping People to Save – the Modernisation of Britain’s Tax and Benefit System). The Bank of England’s monitoring of the savings culture has been in steady decline since 2002 , without a scrap of ongoing regular assessment. As for the FSA, its policy throughout the boom years was to apply a “light touch” regulatory regime to the financial services industry, with the Government in hock to the City thanks to the giant revenues being generated for the Exchequer.
As we can now see all too clearly, it was all a house of cards. With the collapse of the credit-fuelled economy, the chickens are coming home to roost with devastating consequences for pensioners, students, homeowners, small businesses and companies.