Accidental Savers: What To Do With Your Money

What exactly is an ‘accidental saver’?

According to research from financial consultancy LCP, it’s estimated that more than six million employees across the UK have found it easier to save money during the pandemic. In fact, based on Bank of England estimates of increased savings over the period of March-November 2020 alone, these employees are likely to have improved their net wealth by thousands of pounds. The LCP team explains: “Accidental savers tend to be on higher incomes, including those whose jobs allow them to work comfortably from home, thereby saving costs on travel and other work-related costs; but significant numbers of young people have also become accidental savers, primarily through reduced expenditure on holidays and eating out.” In fact, it’s estimated nearly one in three employees under the age of 25 is now in a position to save more, compared with around one in five in the 55-64 age group.

How likely is this to become a permanent trend?

“Whereas social spending is likely to recover significantly once lockdown restrictions are lifted, a structural shift to more home working could lead to lower work-related spending becoming a permanent feature for some groups,” the LCP team argues. “Indeed, it may be that some people will choose to use the money they have saved on holidays in 2020 to go on more expensive holidays in years to come, both because they can afford to do so and as an antidote to a tough year. Ongoing quarantine rules could however act as a dampener on this for some time to come, while there are already reports of UK holiday providers being fully booked for this summer.”

What have people done with their money so far?

The data tells us accidental savings have mostly ended up in a bank account or short-term savings account. Relatively few people have used them to boost long-term savings such as pensions or pay down debt on credit cards or mortgages. However, LCP says there is evidence that people are starting to think more about what to do with the extra cash. “Some financial advisers are reporting increased volumes of discussions about what to do with ‘surplus’ capital,” the team explains. “Investment platforms have also reported a significant growth in new accounts, as potential investors look to buy into stock markets.”

So, what are some of the options to consider?

Those who have benefited from a short-term windfall could try to improve their personal finances by reducing their debt (especially if this constitutes high-cost borrowing), build up a short-term savings buffer to provide security against future unexpected expenditures, and improve their pension saving, especially if their retirement prospects are looking relatively modest. Heidi Allan, senior consultant and financial wellbeing specialist at LCP, says: “This is an opportunity for accidental savers to put their personal finances on a firmer footing by reducing debt and increasing saving. Employers will have a key part to play in ensuring that workers take advantage of this opportunity and do not simply allow these increased balances to sit in current accounts and gradually drift away.”

What’s the most important thing for accidental savers to consider?

Be strategic, says the team at LCP. “Short-term increases can be used to clear debts, especially those with high interest charges; build up a cash ‘buffer’ to provide protection against future financial emergencies; and make additional one-off contributions to pensions and longer-term savings products,” they suggest. “Where new patterns of working offer the potential for recurring reductions in expenditure, consider longer-term financial commitments. These could include participating in workplace savings schemes, especially where these generate a contribution or incentive from the employer; or taking full advantage of workplace pensions, especially where an employer match is available on higher contribution levels.”

Interested? Five ways to make the most of your money…

1. Put it away for a rainy day

If saving’s your main goal, there are several ways to do this. You could always opt for a standard savings account, but with interest rates currently low, an individual savings account (ISA) could be a better option. ISAs offer tax-free interest payments, so you could get more for your money.

2. Invest it properly

An investment fund pools together money from lots of individuals. The fund manager invests the money in a wide range of assets e.g. UK shares, overseas shares, bonds etc. Each investor is issued units, which represent a portion of the holdings of a fund and earns a certain return should the fund perform well overall. If you’re willing to take a high-risk approach, you can also manage your own portfolio of investments in stocks or bonds.

3. Pay down your debts

This might be an opportunity to pay off a lump sum towards a student loan, credit card or overdraft – just be sure to check the T&Cs of your agreements as some banks could penalise you for skipping ahead in the payment plan.

4. Overpay your mortgage

If you’ve got surplus savings, it might be a good idea to use them to reduce the balance on your mortgage. Doing this could save you hundreds or even thousands of pounds in interest. Just beware, some mortgage lenders charge a penalty for you to do this, so check your documents or ask first. 

It’s worth comparing how much interest you’ll pay on your mortgage to the end of its term versus any penalty for making a larger one-off payment.

5. Make more of your pension

Chances are most employees in the UK are already enrolled in a workplace pension scheme, but now might be a good time to chat to your HR manager to see if you could be making a higher contribution. You could also take matters into your own hands by exploring pension products outside of your employer – especially relevant if you’re self-employed. Either way, it’s imperative to take individual, impartial advice on the matter before making any financial decisions.

For more information on saving and investing, visit LCP.UK.com, TheMoneyAdviceService.org.uk and CitizensAdvice.org.uk.

*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.