Warning over rainy day fund raids

Families are being warned not to allow their rainy day savings to dwindle to "dangerous" levels after they were found to be raiding accounts at the fastest rate since the 1970s.

Analysis shows the equivalent of £900 per household was diverted to current accounts in the 12 months to October

Families are being warned not to allow their rainy day savings to dwindle to "dangerous" levels after they were found to be raiding accounts at the fastest rate since the 1970s.

Analysis of Bank of England figures by Sky News found that in the past year, £23 billion has been withdrawn from consumers' long-term savings accounts to convert into cash and put into current accounts, equating to around £900 for every household in the country.

Families were also said to have put £21 billion which might normally have gone into savings accounts into their spending money.

Experts expressed concern that Government policies have driven some hard-pressed households to give up trying to save for a rainy day as they continue to grapple with high living costs and poor interest rates which fail to give them any real returns.

Financial expert and former Downing Street adviser Ros Altmann said the Government's policies had "destroyed the incentive to save".

The Bank of England base rate has been held at a historic 0.5% low for more than four and a half years and the Government's Funding for Lending scheme has been blamed for making savers' plight even worse over the last year.

But the Bank's announcement last week that Funding for Lending is being refocused away from households and towards small business lending has prompted some experts to predict that savings rates could see a small improvement in the coming months.

Dr Altmann described the figures as "truly troubling" and urged Chancellor George Osborne to "recognise the damage done to savers" in his Autumn Statement on Thursday.

She said they suggest that "people have decided to spend their money now, rather than save for the future", adding: "This is the sharpest decline in long-term saving since the crisis years of the 1970s."

She said that while it is unsurprising that some consumers appear to have given up on long-term saving, this is "dangerous for all of us".

She said: "No economy can thrive in the long run without people saving and investing for the future.

"If you just withdraw money to spend today, then growth in future will be lower."

Dr Altmann said Mr Osborne should use the Autumn Statement to raise the tax-free Isa allowance. The allowance for the current tax year is £11,520, of which up to £5,760 can be placed in a cash Isa and the remainder can be put into a stocks and shares Isa.

Funding for Lending, which was launched last year, has given lenders access to cheap finance on condition that they pass on the benefits to borrowers, but experts have said the scheme has made them less reliant on having to attract savers' deposits.

According to financial website Moneyfacts, the average rate on a cash Isa has plummeted from 4.71% five years ago to 1.66%. Even a year ago, the average Isa rate was 2.18%.

Tom McPhail, head of pensions research at financial services firm Hargreaves Lansdown, said that a s a broad rule of thumb, every adult should be putting aside at least 10% of their monthly income towards long-term savings. He said that for someone starting saving in their 30s for the first time, it should be nearer 15%.

Mr McPhail said: "Given the continuing low interest rates on cash savings it is understandable that people are withdrawing their money. However all too often, rather than being channelled into long-term investments the money is just being spent instead.

"We're likely to see an increasingly polarised society, with those who have saved money being able to look after themselves and those who haven't being forced either to carry on working or to rely on very meagre state benefits."

There has been some speculation that the Chancellor will announce on Thursday that families whose children have money trapped in child trust funds (CTFs) will be allowed to transfer them into Junior Isas, also known as Jisas, which often offer more generous returns.

The Government launched a consultation into CTFs earlier this year. They were introduced under the previous government to encourage a lifetime savings habit and most children who were born between September 2002 and January 2011 hold such an account.

These 6.3 million children are barred under the current system from being able to access Jisas, which are the successor tax-free children's savings accounts to CTFs.