The savings boom is decelerating but people continue to squirrel away spare cash, data from the Bank of England (BofE) revealed.
Household deposits with banks and building societies increased by £5.4bn in August, down from a net increase of £7.1bn in July, with households putting £2.6bn into interest-paying deposit accounts, £2.3bn into ISAs and £0.7bn into non-interest-bearing accounts.
Mark Hicks, head of active savings at Hargreaves Lansdown, said the “savings boom” decelerated “very slightly” in August but the data shows people continue to save, with some £26.5bn added to savings accounts since April.
“Despite the slowing of growth, the savings market is still seeing strong flows. With savings rates still available around 4.5%, the prospect of safety and certainty of returns and an inflation-beating rate continues to encourage savers,” he said.
Ian Futcher, financial planner at Quilter, attributed last month’s slowdown in savings to higher costs during the summer months for things such as holidays and children’s clubs, but noted it was “encouraging” that people were still able to top up their savings.
“As the Budget nears, households will be alert to any potential tax or personal finance changes and we could see more looking to pre-emptively boost their savings in the lead up,” he said.
However, the interest rate paid on this new money decreased last month on average by 5 basis points to 3.79%.
Alice Haine, personal finance analyst at Bestinvest, added: “With the BofE holding interest rates at 4% earlier this month, savers still have time to secure competitive deals.
“Savings rates are trending downwards, reflecting the broader trend of interest rate cuts over the past year. But with rate cuts on pause, for now, locking down a good deal rather than leaving money languishing in accounts with ultra-low savings rates, ensures nest eggs can work as hard as possible in the current environment.”
Hicks echoed this, noting that there is “plenty of blue water” between the average fixed rate and the easy-access account. While savers haven’t been compensated for locking money up away in fixed terms over the past few years as banks and building societies kept rates lower in anticipation of rate cuts, now that base rate falls have steadied, they are starting to pay savers more to fix their savings.
“This may encourage flows into fixed terms in the near to medium term. It means anyone who doesn’t need a slice of their cash for a year or two should seriously consider tying it up in a fixed rate deal while rates are so strong,” he said.
However, while rates remain relatively attractive, inflation is on the rise once again and could erode the real value of any return savers receive.
Haine said this, alongside a “growing tax burden” driven by frozen personal tax thresholds, means earnings are not stretching as far as they once did.
“With savings interest also subject to tax, post-tax returns can be disappointing, particularly for higher earners,” she said, noting that an increasing number of savers are now breaching their Personal Savings Allowance.
“Higher rate and additional rate taxpayers are particularly exposed, with just a £500 and zero allowance respectively, compared to £1,000 for basic rate taxpayers. This is where tax efficiency becomes crucial.”
ISAs and pensions can be used to put money away tax-efficiently, while some may also wish to explore a portfolio of short-dated gilts instead of cash.
“The predictable gains that will be made by holding these to maturity is doubly appealing as gilts are exempt from capital gains tax, which makes these a very tax-efficient alternative to cash savings, especially for those subject to the higher and additional rates of tax,” she said.
Elsewhere in the BofE's report, mortgage borrowing declined sharply following changes to stamp duty earlier this year. Net borrowing dropped £200m to £4.3bn, adding to July’s £900m fall.
Futcher said: “Approvals for house purchases - a key forward-looking measure - fell by 500 in August to 64,700, while remortgaging activity also continued to decline, with approvals dropping by 900 to 37,900.
“Although a summer slowdown is typical, when combined with the other ongoing market pressures, including Budget rumours, it could have wider implications for house prices.”
Finally, consumer credit borrowing held steady at £1.7bn in July with a slight decrease in credit card borrowing and a small uptick in other forms of credit.
“While it is positive that borrowing has not risen overall, interest rates are still elevated and the Bank of England’s base rate looks unlikely to fall further for a while yet, so this ongoing reliance on borrowing could be a cause for concern in terms of longer-term financial resilience,” said Futcher.