Lockdown and recession fears push household cash balances up £77bn in H1 2020

The lockdown and fears over the severity of the COVID-19 recession have prompted households to save cash at a record pace, according to Janus Henderson Investment Trusts.

In the first six months of 2020, they stashed away £77bn, far more than the previous record set for a full year (£82bn in 2016). A total £1.5trn of cash is now tucked away in savings accounts. The savings glut, which is spread across ISAs, savings accounts and current accounts continues to increase. This vast sum is roughly equal to the combined value of all UK residential mortgages.

UK households are however only earning small amounts of interest on these savings – just £5.7bn over the whole of 2020. This is more than the record low of £4.6bn in 2017, reflecting a huge increase in savings balances (up by £210bn) and a small increase in average savings interest rates (up from 0.35% in 2017 to 0.39% presently). On current trends, savings interest rates are likely to fall below 2017’s record low.

2007 was the record high point. In that year, savers earned £33.1bn, despite having cash balances two fifths smaller than today. It took five full years (from 2015-2019) for the UK’s cash savings to earn the same amount of interest income, now that interest rates are so low, even with much higher cash balances earning interest.

Personal finance experts recommend that families set aside in cash at least three months of income, to help them weather any sudden change in circumstances. That implies that about £370bn is required for UK households’ collective ‘contingency fund’.

Nevertheless, the data shows they have put away over four times this amount – which means banks have the use of almost £1.2trn in spare cash that their customers could be investing elsewhere.

James de Sausmarez, director and head of investment trusts at Janus Henderson said: “UK savers are squandering the opportunity to earn tens of billions of pounds extra in income on their savings. In my view, interest rates are set to stay low for a very long time, so there is no light at the end of the tunnel for cash. For every one of the last thirteen years, shares have provided a better income than cash. But even years of ultra-low interest rates have not deterred savers from stowing away a record amount of it. Indeed, the amount of spare cash idling unproductively in bank accounts is now, on average, equivalent to almost a whole year of household income, or the entire UK mortgage debt.

“What’s more, this cash is not evenly spread around, but instead is concentrated in the hands of wealthier households. That suggests there is even more than £1trn in cash that isn’t needed to meet contingencies and is therefore available to invest much more productively. Banks call this ‘muppet money’ because they know savers are missing out on much better opportunities elsewhere.”

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