We are currently living through challenging times. With the UK emerging from a global pandemic and the aftermath of Brexit, awful events unfolding in Ukraine, and energy prices and the cost of living rocketing, there are numerous external factors impacting savers’ habits, confidence, and lives.
Working out exactly how these world events are affecting people and how they manage their money is important for savings providers in order to adapt and ensure they’re offering the services and products that savers need, both now and going forward.
Here, we consider how recent and current events are affecting how people manage their money.
The aftermath of the pandemic
The pandemic highlighted for many the importance of having a safety net, and Andy Haldane, the previous Chief Economist at the Bank of England, confirmed at one point that households had accumulated some £150bn of excess savings during the pandemic as spending opportunities were restricted.
However, as the world opens up again and spending increases, external factors outside of savers’ control are threatening the excess savings families accumulated during the pandemic.
The cost of living is soaring
The war in Ukraine and the sanctions against Russia have caused an increase in costs for the supply chains of energy and other products such as wheat and metals, and UK consumers are seeing a knock-on effect in price increases. Research carried out by the Building Societies Association revealed that 65% of survey respondents said that they are worried about the rising price of goods and services over the next six months, and many are taking action by spending less on non-essential purchases.
As well as higher living costs, taxes are also increasing, and tax thresholds are freezing. To manage the increasing living costs many employees are pushing for higher salaries to meet the higher than anticipated inflation rates, but small pay increases set against higher tax rates could result in lower take-home pay.
Research recently conducted by Goldman Sachs suggests that due to the cost-of-living crisis families expect they will be forced to dip into their lockdown savings over the next three years to pay off credit card debts. As inflation continues to rise, and prices are out-weighing wage growth, households are seeing a lack of spending power and are falling back on savings to cover even day-to-day essentials.
As well as dipping into existing savings, the rising cost of living will impact the ability to replenish savings pots. According to the Opinions and Lifestyle Survey conducted by ONS in March, nearly half of adults in the UK said they do not see how it will be possible to put money aside in the next 12 months.
The energy crisis
The energy price hikes being exacerbated by sanctions against Russia is another reason why many savers may need to dip into their savings to cover costs, or to help family members who are struggling. And with more increases likely in October, households are likely to be impacted for some time to come.
The promised £150 council tax rebate designed to lessen the impact of the price hikes will help to soften the blow to consumers in council tax bands A-D but while the £200 energy rebate offered by the government will offer some initial relief, the additional costs of paying it back later down the line may have a knock-on effect on people’s ability to save.
Interest rates are up
As the Bank of England looks to curb the impact of rising inflation, interest rates now sit at 1% - the highest they have been since 2009, and the fourth consecutive increase since December 2021.
This is starting to trickle down to the savings market. Chase Bank made waves by launching a 1.5% easy access account, and with several other providers offering over 1% on easy access savings there are more competitive rates available now than customers have been used to in previous years. This, in turn, appears to be driving increased customer activity with many savers now seemingly searching for better deals after years of seeing little value in switching providers.
The question of whether fixed-rate products are likely to be seen as more or less attractive as a result of the current situation is still to be answered. Do customers want to lock in to longer fixed-term products now, or are they going to sit tight and look for shorter-term fixed rates in the hope that further base rate increases over the coming year will get passed on? Evidence outlined in the latest Moneyfacts Trends report suggests the latter. Flexible savings products such as short-term notice accounts and easy access accounts were becoming increasingly popular in March, as shorter-term notice pots allow savers to be more reactive.
Stay informed
As the world is currently at a heightened state of flux it’s more important than ever to be aware of external factors that are likely to affect savers and savings providers. With a range of complex factors affecting savers’ priorities and behaviours, providers need to be ready to rapidly adapt to new challenges to maintain their competitive edge.
The financial world has undergone numerous changes and challenges in recent years – for information on the key structural and technological changes savings providers are implementing to keep pace with the changing savings landscape, view our latest whitepaper The New Normal for Savings Providers.
