IN THE first quarter of this year, UK households saved just 1 per cent of their gross disposable income, the lowest recorded level of saving in nearly 50 years, according to the Office for National Statistics (ONS). Is it time that Brits rediscovered the savings habit?
Things haven't always been like this. Even as recently as 1996, we were saving over 11 per cent of our disposable income, said the ONS. And relative to other European countries, our pension savings are still in a healthy state. At £1.6 trillion, the
UK has a greater stock of pension savings than the other 26 EU member states added together.
Perhaps the main reason for our failure to save in recent years has been the availability of cheap credit. The instant gratification from spending money, borrowed at low rates of interest, is hard to resist. But dig a bit deeper into the statistics and the reason for our borrowing habit becomes more apparent – houses. Of the average £58,000 owed by each UK household, 84 per cent of it – or £48,700 – is mortgage debt.
Maybe we have not become as profligate as we might think. After all, houses are an investment as well as somewhere to live. But our love affair with bricks and mortar means that we now spend more of our disposable income on servicing mortgage debt. In the last quarter of 2007, we spent nearly one-fifth of our income on mortgage debt compared to around one-tenth back in 1996 when we were saving a lot more.
In fact, there is a direct link between our savings habit and houses. We save more of our income when we spend less on houses, although there is still an underlying trend towards spending rather than saving. In late 1988, like today, we spent around one-fifth of our income on mortgage debt but still managed to save between 4 per cent and 5 per cent of our disposable income.
But times are changing. The credit crunch has forced up the cost of borrowing. This has reduced demand for houses, and prices are now falling throughout the UK. However, that may not mean that we can afford to save more, at least in the short term. Those people who took out a fixed-rate mortgage two, three or five years ago will feel the pain of higher mortgage repayments when their current deal ends. Factor in soaring gas and electricity bills and it is difficult to see how people with mortgages can put more money aside.
Whether we like it or not, in the longer term we will all have to save more if we are to enjoy a long and financially comfortable retirement. Demographic changes mean that the number of people in work and paying taxes relative to those in retirement will continue to fall over the next 40 years. Asking a shrinking number of workers to pay more tax to support older generations is not really a viable option. The only other option is for us all to work on for longer – a prospect unlikely to gain popular support.
After examining all the options, the Pensions Commission recommended that we save more. The government accepted this recommendation and plans to introduce personal pension accounts from 2012. Although these accounts are not compulsory, employers will enrol their employees into one of these accounts or their own pension scheme. Workers will still have the option to opt-out but behavioural science suggests that the majority of people will stay in.
If this doesn't cure our borrow and spend culture, then there is a good chance that paying into a pension plan will become compulsory.
So whether we choose to save more voluntarily (because we spend less of our income on houses) or because we are "encouraged" to save by government, the proportion of our disposable income that we save will probably rise. Those who can afford to, and understand the power of compound interest, will start the savings recovery sooner rather than later.
• John Lawson is head of pensions policy at Standard Life
