The Money and Pensions Service has recently released a rapid evidence review. Several reports detail how Covid-19 has affected the UK's financial well-being on an individual level. One of its reports looks at the pandemic's impact on savings behaviour. The same report also explores the effects on particular groups’ ability to save and the pandemic's impact on people's financial health.
Here, we explore the review's findings around the pandemic's impact on savings.
What has happened to savings since the start of the pandemic?
There has been a substantial increase in the amount of household income being saved. However, there is a clear divide between who has saved and who hasn't. While the amount of household income being saved has vastly increased, it has primarily been saved by the wealthiest 20% of the population. The wealthiest 20% of the UK population are three times more likely to have added to their savings since the start of the pandemic than the least well off 20%.
Due to the reduced expenditure seen in these higher-income households, they have had even more surplus cash. The lack of expenditure resulted from the lack of holidays, going out and other leisure activities. That said, increased saving is not just due to surplus cash. In addition to this driving factor, the report also highlights how people’s attitudes to saving have also changed. In the face of adversity, many are now proactively trying to save, given the uncertainty of the future.
As a result, many households have stashed their cash away. Interestingly, though, the type of savings that the pandemic has encouraged is arguably very short-sighted. The majority of the increase in savings has been added to instant access accounts. It's unclear whether households will eventually want to use these savings to improve pension pots or reduce mortgages. It could be that they wish to have cash on hand and are hesitant to lock it away when the economy is in such a fragile state. Or, it could be that they are saving it for a big splurge when restrictions are gradually eased and eventually lifted.
Several households have suffered income loss and increased expenditure during the pandemic. For them, their savings have taken a hit. This has primarily occurred in households with lower, more variable incomes. Given their low financial resilience, their ability to save has been hindered. And, those counted as having low financial resilience have increased dramatically. At the beginning of 2020, 10.7 million people were categorised as being in this group. That number now stands at 14.2 million.
Some low-income households have been fortunate enough to improve their financial outlook over the pandemic. However, that has not been the case for many. More and more low-income households are relying on savings, according to the Resolution Foundation. Increased expenditure has come from increased energy consumption at home and higher food costs due to being at home more and more.
Additionally, those newly on benefits like Universal Credit saw a delay in receiving that credit. For many, it took one or two months since the initial application to receive payment. As a result, they had to dip into savings to meet day-to-day costs. For that reason, those in the 2nd lowest income group have fared worse than the lowest income group. This group would have likely been receiving benefits already. In fact, due to the uplift in Universal credit, the lowest income group benefitted financially from the pandemic; the Government's policies increased their income!
The impact of Covid-19 on particular groups’ ability to save
While the above details the broad impact on people's ability to save according to their income, there are more subtle variations. The result is that some of the below groups have been even more financially sensitive to the Covid-19 restrictions than others. That has also had a knock-on effect on their ability to save.
Freelancers and contract workers
At the start of the pandemic, the Government implemented financial support schemes to help as many as possible. However, those schemes didn't manage to help everyone. As many as 3.8 million who saw a reduction in earnings during the pandemic didn't receive financial help from the Government. Those in this group are likely to be gig economy workers as well as some of the self-employed.
A large portion of this group are middle-aged homeowners with a family and had, pre-pandemic, been enjoying an income of over £30,000. As a result, many of that group have had to dip into their savings to make everyday payments. The lasting impact means that should they be hit with an unexpected, significant emergency expense, they no longer will be in the position to make it.
Other figures reported that far fewer self-employed people were able to save at the end of 2020 compared to those regularly employed. In contrast, about half of those in employment could save. And, if individuals were newly self-employed at the beginning of the pandemic, they would have difficulty making day to day payments.
Due to school closures during lockdowns in 2020 and at the beginning of 2021, parents have struggled to make savings. In particular, women have been disproportionately affected by the impact of lockdown restrictions. Women were more likely to be in roles where they were made redundant or saw a cut in their already low income.
Plus, lower-income and younger parents were less prepared in terms of savings even before the pandemic. As they were already in a precarious financial situation, they were even more sensitive to any cuts in income. Plus, with children at home all the time, there was also an increase in expenditure.
Like young parents, young professionals have seen their finances negatively affected. Young professionals are likely to have been employed in certain sectors at the beginning of the pandemic. Those sectors, like hospitality, travel or other gig economy positions, were hardest hit by the restrictions. The ONS reported that 57.7% of those under 30 at the beginning of the pandemic could save. That had reduced to 45.5% at the end of 2020.
Perhaps unsurprisingly given how low mortgage rates are at the moment, renters have been far less able to save in 2020 and 2021 than homeowners. Additionally, however, renters will usually be lower-income families as well as younger. As a result, they are far more likely to have several financial headwinds to navigate. They are more likely to work in a badly affected job sector resulting in an income reduction. Plus, they will probably have seen increased expenditure from lack of childcare and more time at home.
Ethnic minority communities
Finally, ethnic minority communities have also been disproportionately affected by the pandemic in terms of their finances. It has been well publicised that ethnic minorities have had a far higher chance of catching Covid-19. However, they will also have suffered from less income and fewer savings. One survey by YouGov found 36% of BAME individuals lost some or all of their income. 40% of BAME individuals surveyed said the pandemic had negatively affected their savings.
How the pandemic has affected savings mindsets
The pandemic has affected us all in so many ways, seismically so in many cases. Its power to influence people's views has resulted from restrictions continuing for such a long and sustained period. It arguably has materially shifted people's perceptions of many aspects of life. Some, for example, have enjoyed spending more time at home with their families and being forced to slow down. Others have had their approach to money changed, perhaps because their spending habits have been so altered. Or because their income has changed, forcing them to view income and savings differently.
One such area that has seen a significant increase in popularity is the workplace savings initiatives that some employers offer. 72% of employees want to be offered such a scheme by their employees. These schemes promote regular and consistent savings. At the same time, they also promote a positive attitude to money, savings and spending.
One group that has had their attitude to spending altered drastically are women. In research conducted by Virgin Money and Britain Thinks, a survey found that women are now motivated to maintain the better spending habits they had during lockdowns. 46% of women want to continue as they have been, though 40% of men also admitted the same.
Millennials, as well as older generations, seem to have changed attitudes in comparison to pre-pandemic times. 37% now want to save regularly, and 35% say they will take a proactive approach to managing their finances. 2 out of 3 18-25-year-olds are now saving as much of their salary as possible. Compare that to the over 55s, where only a third do the same. It looks like the pandemic has had a profound effect on younger generations. As a result, they may soon become the biggest savers!
Covid-19 and the future of savings
It seems strange that in the face of substantial financial hardship for some, others have done financially well out of the lockdown restrictions. Unemployment is at the highest level it has been for years. Yet, others, mainly the already well off, have managed to bolster their financial position. As a result, the pandemic looks like it has exacerbated a divide between higher-income and lower-income families.
However, there is a sliver of good news. Perhaps the hardship that younger generations have experienced will encourage a nation of savers. Younger generations have learnt the hard way not to take for granted a consistent income like their parents have enjoyed.