Savers withdrew £2.3 billion from their nest-eggs in January, the first monthly fall in retail deposits since July last year and the largest amount since records began more than a decade ago.
The British Bankers’ Association (BBA), which produced the figure, says the fall in the nation’s collective savings balance reflects the number of people needing to dip into their rainy day funds to help weather the economic storm. It also indicates a growing trend among people to move their money into alternative financial products.
Alternative research recently estimated that 4.3 million savers will withdraw their tax-free savings from their ISAs this year, potentially gifting the taxman £39 million in extra revenue as a result.
Falling interest rates, combined with the need for the extra money and the belief that better rates can be found elsewhere, will lead the majority of savers to call on their funds, according to uSwitch.com.
Many are now considering stocks and shares ISAs. Broker Hargreaves Lansdown reports an increase in the number of customers requesting to transfer their cash ISA balances into stocks and shares ISAs.
“Investors were reluctant to make the move [into stocks and shares ISAs] last year because returns on cash were relatively high and the stockmarket was highly volatile,” says Meera Patel, a senior analyst at Hargreaves Lansdown. “But with cash providing such a poor return, we are seeing investors prepared to take a greater risk with their savings as we head towards 0% interest rates this year.”
The BBA's figures also show that the number of mortgages approvals rose by £2.9 billion in January. However, there appears to be only limited demand for unsecured credit, such as credit cards or personal loans, with a small increase of just £0.1 billion during the month.
David Dooks, statistics director at the BBA, says mortgage lending is increasing, but in a much smaller market.
“There is only limited demand from households for unsecured credit, while a fall in their deposits in January reflects a tendency to draw on cash or to move into alternative financial products,” he adds.
Ed Stansfield, property economist at Capital Economics, says that despite the rise, mortgage lending is likely to remain “subdued” for the rest of 2009.
“The impact of the recession will limit mortgage demand as well as making lenders cautious about advancing new loans,” he explains. “Only when both buyers and lenders believe that house prices are at, or at least close to, their floor will mortgage approvals pick up significantly.”