Bill Jamieson: Why not saving seems the rational thing to do

IT WAS, Alastair Darling recalled, the last thing he wanted to hear from the Bank of England Governor. Four years ago, they gazed at the horrifying spectacle of worried Northern Rock savers queuing to withdraw their money.

Mervyn King’s summation was chilling: “They’re behaving quite rationally, you know.”

Reading the latest Scottish Widows Savings and Investment Report out today on the current low levels of saving, King’s comment is just as apt.

Ultra-low interest rates on deposit accounts; inflation at more than double the official target rate; volatile stock markets, and above all, a squeeze on household incomes that has made saving difficult for millions: it’s little wonder the savings industry has cause for worry as one disincentive after another has been piled on households wanting to save for the long term.

It also doesn’t help when politicians talk of withdrawing higher rate tax relief on pension contributions and taking a slice of the currently tax-free lump sum retirees can take on part of their maturing pension.

Against this daunting backdrop arguably the most surprising statistic to emerge from this Scottish Widows survey is a 6 per cent increase in savers since last year. Indeed, it is the resilience of savings that speaks to that indestructible instinct of millions of households to put something by. And that instinct is never more pronounced when, on a macro level, the rainy day arrives.

The survey, based on interviews with 5,000 UK adults in the first week of January, is an invaluable check on savings behaviour and attitudes and one which the savings industry overall should take note of. There is much here to be concerned about, but also, too, some grounds for encouragement.

Savers are certainly under no illusions about a quick fix to our economic problems – one of the survey’s most striking findings is the extent to which pessimism has risen. Only 11 per cent of the population expects to see an economic improvement over the next 12 months, compared with 15 per cent in 2011 and 29 per cent in 2010.

Despite that backdrop – or perhaps because of it – there has been a slight rise in the proportion of the UK population currently saving in some capacity: 68 per cent, up from 64 per cent last year.

Encouraging though this is, the report points out this is a big step down from 2009, when 77 per cent of the population was saving – and it adds: “There is no suggestion that we’ll get back to this level anytime soon.” You don’t need a calculator to work out the consequences of greater longevity on low pension saving.

Looking at the amounts being saved, the story here is also one of modest improvement on 2011 – but a big step down on three years ago. The mean amount actually saved during 2011 was £2,399, up £365 on 2010. But it is down £703 on 2009, with 57 per cent of those surveyed saving less.

Time and again we are reminded that the biggest obstacle to saving is the squeeze on disposable income – the deadly combination of standstill earnings growth and rising inflation. Only a quarter of adults believe they are saving enough to meet their long-term needs. Of those not saving for the long term, a third claims that they do not have any money available to save. But the failure to save for the long term represents a conscious choice for others, with one in four identifying their priorities as short-term only.

“This is a group”, the report notes, “where there is a specific challenge for government and industry to re-state the case for long-term saving in a compelling manner”.

However, should we worry about saving at all? Some argue that policy should in fact encourage “dis-saving” in order to boost spending and economic recovery. But this overlooks a critical point. A major reason for depressed consumer demand is lack of confidence. And central to any recovery is a rebalancing of household finances to bring down lending and improve savings. Stepping up savings even by a small monthly amount helps reinforce a good habit and boosts confidence and self-esteem.

So the financial sector needs to press on with improvements to the transparency and simplification of pension saving, with greater concentration on capital protection – the key goal of millions of savers.

And there is much government can do, including stop treating pension saving as an easy target to raid for their vote-buying spending schemes. Removing higher-rate tax relief for pension contributions would kill the rationale for many – particularly the self-employed. And surely savings income below, say, £500 should be exempt from tax: nothing has been more absurd for millions over the past two years than having to pay tax on derisory levels of income on bank deposit and building society accounts. Remember that this is tax levied on sums saved out of already taxed income.

As long as governments keep treating savings – and particularly pension savings – as surplus funds to be raided or as an expendable casualty in the greater cause of Quantitative Easing, we should not be surprised at the long-term damage inflicted on the savings ethic. If we subsequently choose not to save, or not save much, are we not “behaving quite rationally”?