Savings: Why has £23 billion been withdrawn from long term savings accounts?


The money shotNew figures from the Bank of England have revealed savers in the UK have been withdrawing money from long term savings accounts at an almost unprecedented rate.

According to the Bank, savers have taken a massive £23 billion out of long term savings accounts over the past 12 months; the largest amount for 40 years.

The money withdrawn has either been spent or put into short term, easy access, accounts.

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Experts suggest there could be a number of reasons why savers have withdrawn such large amounts of money from their accounts:

  • Interest rates are at all-time lows, reducing the benefit of saving
  • Buoyed by the improving economy, consumers are perhaps more willing to spend their savings, the reverse of what happened in 2007 at the height of the financial crisis, when savings rates rose
  • In contrast, some experts believe that as the cost of living rises quicker than earnings, people will have been forced to raid their savings simply to meet the day to day cost of living
  • As the stock market improves, many savers will have been tempted to become investors, especially whilst interest rates are so low

Instant access savings accounts

The figures also reveal interesting trend, with an increase in the amount of money held in instant access savings accounts.

Whilst longer term fixed rate bonds tend to pay better interest rates, it is likely some savers have turned their bank on these accounts, preferring the increased flexibility offered by instant access accounts, hoping they can take advantage of a future rise in interest rates.

And they might just be proved right.

Relief in sight for savers?

Those savers who have decided against the long term fixed rates on offer, which are available for up to 10 years, could well have made the right choice, with the news last week that the Funding for Lending scheme is to partially end at the start of 2014.

Savings Why has 23 billion been withdrawn from long term savings accounts 400pxInterest rates on savings accounts initially fell after the financial crisis and then, as the graph shows, dropped again, when the Funding for Lending scheme was introduced in August 2012.

However, last week the Bank of England and the Treasury announced that from January 2014 the Funding for Lending scheme would no longer be available to finance mortgages. With this cheap source of finance removed it is hoped banks and building societies will push up interest rates on savings accounts, as they revert to a more traditional source of financing.

Savers hoping to see a sharp bounce in interest rates in January will be disappointed though. Banks and building societies will have reserves of capital, acquired from the scheme, still to lend out. But as the year progresses, savers should see a welcome, if gentle, increase in interest rates.