This week, I did something I haven’t done since March. I bought a skinny cappuccino.
As I was taxied into the ghost town of the West End to record a live slot on the BBC’s Your Money and Your Life programme, how could I resist a quick visit to the empty Caffè Nero underneath Broadcasting House?
A top note of hand sanitiser cut through the aroma of freshly ground coffee beans, but this did not spoil my enjoyment. Nor did the £2.79 charge — one of the few frivolous purchases to show up on my bank statements for months.
Under lockdown, the chances are that an inability to spend money on so-called “discretionary” items has similarly boosted your bank balance.
Data from the Bank of England this week showed that household bank deposits increased by a record £25.6bn in May, meaning an extra £56bn of cash has been squirrelled away since March.
This follows Office for National Statistics estimates that the average household has made “forced savings” of £182 per week under lockdown.
Of course, there are plenty of groups who are less likely to be in the money — families on low incomes, those renting a home, the millions of (mostly) self-employed people who have “fallen between the cracks” of government support schemes, and those who have already been made redundant.
The UK’s 9m furloughed workers will also be putting money aside, fearing that as government support eases off, they could also lose their jobs. Be aware, however, that household savings above £6,000 will reduce or rule out any entitlement to means-tested benefits.
Building a cash buffer is undoubtedly a sensible reaction to all this uncertainty, yet it is one of the great ironies of the pandemic that rates of savings have risen at a time when interest rates are the lowest they’ve ever been.
You might be comforted by looking at all of that cash accumulating in your current account — but it’s unlikely you’ll be earning any interest on it.
Average rates on easy access savings accounts have dipped to a paltry 0.29 per cent following two emergency cuts to the base rate and many current accounts pay nothing at all.
National Savings & Investments, the state-backed savings bank, is paying 1.15 per cent on its income bonds (you can buy them in increments of £500, hold up to £1m and there’s no notice period or penalty for withdrawals). Another plus is that 100 per cent of your cash is protected by HM Treasury — much higher than the standard £85,000 under the Financial Services Compensation Scheme.
Plenty of money is sloshing into Premium Bonds. You can hold up to £50,000 per person, and while no interest is payable, you do have the chance of winning tax-free cash prizes in the monthly draws (if you hold the maximum amount, the equivalent rate of interest is 1.4 per cent). The government postponed planned cuts to the prize fund in April, but judging by the number of people who tell me they’re buying bonds, it won’t be long before it falls again.
Locking up your money for longer doesn’t boost rates by much — the current rates on three- and five-year savings bonds are not much higher than those lasting one year.
An option worth exploring for the under-40s is the Lifetime Isa. Building societies offer cash versions of these accounts; pay in up to £4,000 per year and you’ll get a 25 per cent government bonus worth up to £1,000. The catch is, you can only use the cash to buy your first property, or access after the age of 60 to boost your retirement. If you’re saving for that length of time, a stocks and shares Lisa is likely to be the better option.
Interest rates on savings may have hit rock bottom, but interest rates on debts are another matter. Credit cards are commonly 20 per cent or more. The Bank of England data also showed that consumers are getting “recession ready” by using spare cash to pay down debts with net credit contracting by £4.6bn in May.
If you’re able to remortgage your home on a cheaper deal, you could plough the monthly savings into overpaying your new loan, potentially knocking years off the term without altering your monthly budget. Those who want to keep cash on hand could consider an offset mortgage (you aren’t charged interest on cash held against your mortgage balance — and the rates on offset mortgages are generally higher than savings accounts).
Still, some people will be confident enough to consider a longer-term home for their savings. Record numbers have been opening investment accounts such as stocks and shares Isas under lockdown.
And a separate survey from Aviva this week found that although one in 10 people were pausing or cutting pension contributions, 5 per cent had increased the amount they’re paying in, and 8 per cent had checked where their pension is invested (rising to 17 per cent of 25-34 year olds).
All of this sensible penny-pinching is surprisingly lost on the UK chancellor, who wants us to spend, spend, spend and get the economy moving.
In England, “reopening day” this Saturday will see pubs, restaurants and hairdressers open their doors, albeit with very strict rules in place to ensure customers adhere to social distancing. Bookings for holidays and flights are slowly taking off again (I finally managed to get an £800 refund from easyJet this week — could this be why?). There have also been rumours of a temporary VAT cut.
Considering worries over job security, I think a lot of people will want to carry on saving as much as they can for as long as they can. But this is also a critical time for all kinds of small businesses, many of whom are already fighting for survival. Plenty of local shops have seen custom surge under lockdown, yet now fear this will shrink back as people start to return to work.
So, I am allowing myself to go on a bit of a spending spree. As well as continuing to support our local deli, grocer, butcher, baker, newsagent, post office and bookshop, I’ve bought a fresh batch of plants from our local florist for me to slowly kill, and look forward to a daily coffee (iced or skinny cappuccino) after taking exercise in our local park now that the café has reopened. Diet permitting, I’ll also be popping into my favourite restaurant this weekend for a takeaway Margherita pizza and fig Negroni. And I am on the waiting list for a full head of highlights.
These small habits won’t make much difference to my personal savings rate — but if enough of us keep contributing, we could be saving our local businesses from closure.
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