Warning for Scots over dire state of savings

Published on Saturday 31 October 2009 13:56

SCOTLAND has not only lost the savings habit, but its reliance on public sector jobs and pensions leave it more exposed to the years of austerity to come, according to a major new savings report.

Compared with Britons south of the Border, Scots have fewer savings accounts (46 per cent of adults compared with 54 per cent elsewhere in the UK), fewer National Savings & Investments holdings (11 per cent compared with 18 per cent) and fewer long-term investments (63 per cent compared with 70 per cent).

Even among the highest earners, a seventh have no savings at all. Of those with a rainy day fund, three-quarters earning up to 40,000 have less than 3,000 to fall back on.

This savings shortfall is also hitting pensions. More retirees in Scotland (29 per cent) are forced to fall back on means-tested benefits than in the rest of the UK, where 25 per cent receive Pension Credit.

Such paltry savings are always a concern in a time of recession. However, the report's author, savings guru Stewart Ritchie, believes Scotland's reliance on the public sector makes it "uniquely vulnerable".

He claims, for example, that compared with England, Scotland has suffered less from the demise of final salary pension schemes so far, because so many employees are relying on public sector pensions.

Ritchie said: "When you look at how they have become unaffordable for private industry, it is hard not to conclude that major reforms are due at some stage for public sector pensions too. These might take the form of increasing employer contributions, cutting benefits, raising the age at which the pension could be paid or ultimately closing the schemes down.

"We have seen how promises about state pensions have been broken by requiring people to work longer than they expected. Public sector employees could be hit hard by reforms to their pension if they have no alternative savings. Some will also suffer if they lose their job as a result of cutbacks in public spending."

These comments were reinforced at a local authority pensions conference in Cardiff last week, when politicians were called upon to "grasp the nettle" of local authority pensions by establishing an independent commission into the future viability of these pensions, which are largely paid for by taxpayers.

Anthony Mayer, chairman of one of the biggest local authority pension funds, said it is both possible and desirable to make pension funds affordable with a programme of reform. He warned that the cost of doing nothing was the almost inevitable closure of these schemes.

The only good news in the report, entitled "Time for a homecoming to thrift and prudence", was that Scots have fewer personal and student loans than other Britons, at 9 per cent compared with 13 per cent, but this could reflect the difference in university funding.

Scotland on Sunday has drawn up a ten-point plan to get you saving and keep the wolf from the door.

1 Start today

Traditional wisdom says that you need a rainy day fund of three months' salary in the bank to meet emergencies or to keep you going if you lose your job. This is roughly 7,000 for those on average earnings. Pensioners don't need to protect their income, but most feel uncomfortable without the cost of their funeral in the bank, which typically comes to around 2,500.

2 Save regularly

Most people claim they cannot save. But if you open a regular savings account and put a small amount in each month, you will be surprised how quickly a nest egg can build up. Once in the habit you don't even notice the money leaving your account.

It normally pays to settle debts before you start saving. But if you find it impossible to get any money tucked away at the bank, the discipline of small regular savings may be worth running alongside debt repayments. The rates on regular savers are also attractive. Norwich & Peterborough is currently paying 5 per cent on monthly deposits of 1, with the Scottish Building Society paying 4 per cent on 25 monthly savings.

3 Be a rate tart

Closely monitor the return on your accounts and aggressively switch to get the highest income you can. But always read the small print that comes with the account. For example, many accounts paying superior interest include a bonus, which may run out after six months or a year. If you don't move your money you will end up languishing on a low return.

4 Don't pay tax

Always shelter your savings from tax. For short-term nest eggs this means tax-free Isas, but for longer-term savings consider pensions.

5 Exploit any help

Always join your company pension scheme at the earliest opportunity. Otherwise you forgo your employer's contribution.

6 Never put all your eggs in one basket

Never rely on one source of financial security, like putting all your money into property. If the market crashes when you need to cash out, you will pay a very heavy penalty.

With investments, something is always going up, while something else is always going down. By spreading the risk, you can be sure that you are always enjoying whichever sector is booming.

7 Spread your cash around

Only invest a maximum 50,000 with any one bank or building society, and make sure it is fully authorised by the Financial Services Authority. If it runs into trouble, your savings up to 50,000 will be fully protected by the Financial Services Compensation Scheme.

8 Don't worry

Don't be afraid to take a risk with your long-term savings. The stock market can provide better returns in the long run. But it's no use trying to time your entrances and exits. Even the professionals can't get it right. It's time in the market, not timing the market, which brings rewards.

9 Plan as a couple

Couples often have different tax status today, and are likely to have in the future. Make sure you spread savings between you to make the most of the lower tax.

10 Exploit your children

Children have their own allowances, which allow them to receive interest tax-free. Once you've used up your annual Isa allowance, money can be sheltered in their accounts.