Page last updated at 23:00 GMT, Wednesday, 16 September 2009 00:00 UK

Have we become a nation of savers?

Analysis
By Kevin Peachey
Personal finance reporter, BBC News

Purse
The safety of people's savings has become a major issue

At 7am on a dull morning last autumn, 150 people were already waiting in a telephone queue eager to move their money into a National Savings account.

The banking crisis was at its peak and the National Savings and Investments (NS&I) call centre was witnessing unprecedented demand.

"Some were panicking, most were just concerned and wanted to move their money quickly," said John Prout, sales director for NS&I.

"The response of our staff was staggering. Some were giving up holidays, others were coming straight from the airport to work in the call centre. We had contingency plans, but not really for something like that."

At the height of the crisis, savers were desperate to ensure their deposits were safe. Despite government guarantees that savings were secure, many moved their cash to NS&I and other government-backed institutions, such as Northern Rock which had suffered its own run by savers a year earlier.

People aged under 40 have lived through an ever-expanding world of credit during their adult lives.
Peter Hahn, Cass Business School

But eventually savers will again value opportunity over security, according to banking expert Peter Hahn of the Cass Business School.

"The longer the economic expansion, so the awareness of risk declines. It will not be long before we start seeing the need to earn a little more from our savings."

In the meantime, it seems as though we are more interested in paying off our debts than saving hard. Ironically, more borrowing and spending now would be helpful to the UK economy during recession.

Easy credit

Back in mid-2007, borrowing money seemed so secure, so easy, and so cheap. The Northern Rock Together deal - a 95% mortgage topped up with a loan of up to 30% - has become the image of the easy credit generation.

But plenty of other loans were easy to come by. We eventually had our hands on 56 million credit cards in the UK.

In the meantime, our savings habit was waning. In 2008, we saved less than 2% of household income, compared with 10% in 1995.

"People aged under 40 have lived through an ever-expanding world of credit during their adult lives. They invested in homes and vehicles and accepted popular wisdom of a limited risk in borrowing," says Mr Hahn.

£1 coin
Banks are looking to rebuild after the crisis

First-time buyers and self-certified borrowers joined the party, and those starting a business were given easy access to credit.

But eventually, as more risky borrowers started to default, and banks realised these bad loans had been packaged up with good ones, this easy access was over. The credit crunch became a household crisis.

As financial institutions wavered, and occasionally collapsed - most notably the Icelandic banks that had offered high levels of interest - savers decided to value security over opportunity.

The official level of protection for deposits rose to £50,000 per saver per institution, but the government made it pretty clear it would actually cover all depositors' losses if a bank went bust.

Yet the flight to safety was underway. NS&I, which sees its profits go to the Treasury, received 340,000 calls in October 2008 compared with 85,000 in a typical month. The nationalised Northern Rock also saw a sharp inflow of funds.

Saving change

So, has the UK given up the borrowing craze and become a nation of savers?

Bank rate graph

There are an estimated 35 million people with savings of some type in the country, nearly double the estimated 18 million people who have mortgages.

Yet the size of the borrowings and savings actually reveals that UK consumers borrow more than they save.

Total household savings in July 2009 stood at £1.1 trillion - with banks holding a 70.2% share, building societies with 21.1% and NS&I with 8.7%.

In the same month, total outstanding lending to individuals, according to the Bank of England, stood at £1.46 trillion. Of this, £1.23 trillion was mortgage debt and £231m was other forms of consumer credit.

Personal debt was about £1 trillion lower in 1993 than it was in July 2009.

But in a striking development in July, UK households paid back more debt than they took out for the first time since the Bank of England started collecting data 16 years earlier.

So why did this mood swing happen? Have we all suddenly become a nation of worthy savers?

Interest rates

During the crisis, the Bank of England dropped the Bank rate and so variable rate mortgage holders saw their repayments drop significantly.

At the same time the returns on savings fell sharply. The Bank rate has remained at its record low of 0.5% since March, and the Bank's governor Mervyn King recently implied that it could remain so until into 2011.

Consequently, those who have some funds to save or invest are looking to pay off debts - such as reducing the balance on their mortgage or paying off credit card debts.

In July, the average individual paid back £10 more debt than he or she took out, but the average debt still stood at £24,000 each. Compare that with the recession of the 1990s, when net mortgage lending rose throughout the downturn, and you realise something unusual is happening.

The BBC's economics editor Stephanie Flanders says: "The fact that lending has actually fallen tell us that these are truly exceptional times."

Paying-off debts is seen as a better option than putting the money in a savings account where it would earn little interest, according to David Black, banking consultant at financial data company Defaqto.

Saving, spending and borrowing could also all be hit as more people lose their jobs.

Meanwhile, there remains a drought in access to credit. Banks and building societies are looking to rebuild their finances and so are more picky with who they lend to.

People in work are finding that borrowing has become considerably more expensive, and saving is bringing very little return, so many are looking to pay off debts instead.

When the economy picks up again, we might all find the options and attractiveness of saving and borrowing to be greater - but which will we choose to concentrate on?



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