Savings slump but amount borrowed curtailed

People collectively saved 16.53bn during the three months to the end of March, down from 24.08bn during the previous quarter and the lowest level for a year, according to professional advice website unbiased.co.uk

But there was also a steep drop in the amount of money people borrowed through credit cards, loans and equity release, with this falling to 6.09bn, after more than doubling to 14.35bn during the previous three months.

The group said the drop in both savings and borrowing levels suggested that people were focusing on reducing their reliance on debt, but this was happening at the expense of saving.

It added that despite the lower level of debt people took on during the first quarter, consumers still borrowed an average of 37p for every 1 they managed to save. Savings levels have been falling steadily since the middle of 2008, when people consistently set aside more than 30bn a quarter.

They instead focused on paying down their debt during the second half of that year, reducing their borrowings by 1.22 and 1.67 for every 1 they saved during the third and fourth quarter respectively.

But borrowing levels began to creep up again during 2009, while the amount people were saving failed to recover. Karen Barrett, chief executive of unbiased.co.uk, said: "Britons appear to have started 2010 with a tighter grip on their finances, as they are not borrowing as much as they were in 2009, even though this has resulted in a drop to savings levels."

There was more bad news for savers this week, with research from financial website Moneynet.co.uk showing that a dozen best buy savings deals have either been withdrawn or had their rates slashed during the past week.

The majority of the products affected are fixed rate bonds, which are currently paying the best returns available to savers, while the rates available on a number of ISAs have also been cut.

State Bank of India has reduced the interest it pays on its market-leading two-year fixed rate bond from 4 per cent to 3.5 per cent, while it has also cut returns on its one-year bond.

Northern Rock's regular saver, which offered a rate of 5 per cent, making it one of the few products that enabled basic rate tax payers to beat inflation, has been withdrawn for new customers.

Andrew Hagger, of Moneynet.co.uk, said: "With rates at rock bottom there's little incentive to save, and many people are starting to wake up to the fact the financial rewards are greater if they make overpayments on their mortgage or credit card borrowing."