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Will traditional savings accounts become relics?

18 February 2021

John Ellmore, director of NerdWallet UK, looks at savings and investment strategies of UK adults during the Covid-19 pandemic and what we can deduce from them.

Saving has been a challenging task for Britons throughout the previous 12 months.

COVID-19, Brexit uncertainties and record-low interest rates of 0.1% placed a substantial strain on household finances throughout 2020. What’s more, the central bank’s Monetary Policy Committee (MPC) unanimously voted to maintain the Bank Rate at 0.1 percent in early February, whilst confirming that it would take banks six months to prepare for negative interest rates.

Though there is no definite confirmation that rates will fall below zero, the MPC’s statement is unlikely to offer comfort to savers. Indeed, a recent survey of over 2000 UK adults commissioned by NerdWallet revealed that 38% of respondents have been saving less since interest rates were slashed in March 2020.

Meanwhile, almost half of those surveyed admitted that they are planning to withdraw some or all of their money from savings accounts, should base rates drop below zero.

Such uncertainty is inevitably causing Britons to rethink their current savings strategies.

A move away from traditional savings accounts

It is evident that many Britons are looking beyond traditional savings accounts and seeking alternative avenues to make their money work harder.

For example, it might come as a surprise that over a third (36%) are considering investing some of their savings in stocks and shares, as they can potentially offer generous gains if the investments perform well. That said, while stocks and shares naturally involve a higher degree of risk, they also offer the potential to make greater returns on investment.

Meanwhile, almost half (47%) are now more open to using ISA as a vehicle for saving. This is hardly unexpected, as they offer Britons a tax-free method of building up their long-term savings. What’s more, there are a variety of ISAs on offer – from Cash ISAs to Lifetime ISAs (LISA) – so savers should be able to find an account to suit their financial goals.

Perhaps a more surprising development, is the fact that over a quarter (29%) of those surveyed stated that they are planning to save more money into a pension scheme, rather than in conventional savings accounts in 2021. Even more unexpectedly, amongst the younger respondents surveyed, this figure rose to almost half (48%). Evidently, the current climate has emphasised more than ever the importance of creating solid foundations for the future – especially for younger generations.

Fostering a generation of savvier savers

So, does this mean that traditional savings accounts will fade into obscurity? This is highly unlikely. After all, an overwhelming majority (72%) still believe that it is sensible to keep some money in a savings account even in the current climate.

However, I anticipate that we will see the rise of a new generation of savvier savers. Indeed, the aforementioned NerdWallet research revealed that since the beginning of 2020, the majority (52%) of savers have already started searching the market for savings accounts that offer a more generous interest rate than their current one. Such figures suggest that savings accounts are likely to remain a prominent tool in many people’s savings strategies.

That said, I also expect to see more people looking to diversify their savings strategies. For example, some might place some of their money in traditional savings accounts, whilst placing the rest in stocks and shares or a pension. Doing so could ensure that individuals are still able to make some returns on their savings, even during times of economic instability.

Ultimately, it is obvious that the turbulent economy at the moment has shifted priorities for Britons. I predict that savers will become far more proactive with their finances, and thoroughly research different savings methods and potentially diversify their strategies.

Of course, there is no one-size-fits-all savings strategy, but as long as adults explore all options available, they should be able to plan their financial future with confidence.

Professional Paraplanner