The UK personal savings and investments industry is dependent on a number of micro and macro economic factors. Personal disposable income (PDI) and consumer expenditure both have a direct impact, as do inflation, interest rates and, thus, the performance of the economy as a whole.

During 1999, total savings in the UK have continued to fall, although the annual decline, at 7.5 percent, was much smaller than the 36 percent recorded in 1998. Savings fell, in 1998, after having received a boost from windfall payments from building society conversions in 1996 and 1997. However, at some £31.2bn in 1999, total savings were at their lowest level since 1994 and this trend has clearly been influenced by other factors, principally falling interest rates on savings accounts and increased consumer spending as a result of an improving domestic economic scenario. The most recently published figures, for the first two quarters of 2000, suggested a 23 percent drop in gross savings levels relative to the first two quarters of 1999, confirming a downward trend.

Research has shown that savers tend to be people who already have some wealth. The take-up of newer initiatives, such as TESSAs, PEPs and now ISAs, has tended to be by those with savings accounts already. The percentage of households in the UK with no savings at all has increased over the past two decades, to around 10 percent. This increase has tended to be among single parent families who are not working and, thus, there is a concentration of lack of wealth amongst these households.

In terms of savings products, there has been a notable rise in the number of no-notice, or short term, accounts in the past few years. They are now widely available, with very competitive interest rates. However, they usually have restrictions on the number, or frequency, of withdrawals.

Interest rates are relevant to savers because they govern the return on savings. The Government uses base rate changes to control inflation. Interest rates have remained relatively low and stable, since the end of 1999, and this has held down interest rates offered, on savings accounts, by banks and building societies, both of which institutions have been criticised for being quick to decrease savings rates when base rates fall and slow to raise them when base rates rise.

The taxation of savings is a major issue affecting the market. Tax on savings interest is a deterrent to savers and, therefore, the Government has introduced concessions to encourage savers. The latest tax-free savings product is the ISA. This follows PEPs and TESSAs, which were both considered to be very successful in encouraging people to save.

Technological developments are also having an impact on savings and investments. Consumers are discovering the benefits of telephone and Internet banking, in terms of convenience and flexibility. The Internet is also a valuable information tool to convey facts about the savings market to consumers. For example, daily equity markets are available online in real time so that investors can keep abreast of their interests. Many new savings and investments are exclusive to the Internet and this new medium is allowing new entrants into the market, whereas before they were inhibited by lack of branch networks. This has led to intense competition between financial service organisations and better deals for the consumer.

Typical savers are early middle-aged and over, but these people face increasing pressure on their income, in terms of paying for their children's education and paying off their own, together with the financial pressures of home ownership.

National Opinion Poll (NOP) research, carried out exclusively for this report, suggested that around 93 percent of all adults had some kind of savings or investments. The most popular products were life insurance, personal pensions and bank and building society accounts that require more than three months notice of withdrawal. Since the last report was written, in 1999, NOP research suggested that ownership levels had fallen generally, with only ISAs showing an increase; short-notice bank and building society accounts had become markedly less popular, no doubt because of falling interest rates. Other sharp falls in ownership levels were recorded for stocks and shares and for National Savings.

Banks offer a wide range of savings and investments. The industry has been transformed by new technology; new delivery methods have increased efficiency and led to the closure of branches. Consumers are demanding more choice and more flexibility from banks, including 24-hour banking from their living rooms. In the future, branches will continue to close, as banks have to stay competitive by responding to customers' changing needs.

Building societies have been undergoing major change, with the demutualisation of many of the larger players and their conversions into banks. Mutual societies are now at a relative advantage, as they can offer more competitive rates of interest. Building societies are considered to be a low risk investment. They are now also offering a wider range of products, which include many savings accounts as well as their more traditional role of lending. The number of building society branches is decreasing, for the same reason as for banks, and building societies are following the trend of offering more services online and over the telephone. Competition will increase for building societies in the future, but so far they have remained at the top of many performance tables and their rates compare favourably with banks.

National Savings is the second largest savings organisation in the UK. Premium bonds are their most popular product, especially with the introduction of the monthly £1m jackpot in 1994. National Savings have launched a number of products over the past 12 months, including an ISA, and they are moving with the times in using new delivery methods, such as the Internet and the telephone.

There are a vast number of TESSAs and PEPs still in existence, many in their early stages, as there was a rush to open these accounts in the last few weeks that they were on offer.

ISAs were introduced in April 1999, to replace PEPs and TESSAs, and are guaranteed to run tax-free for 10 years. They can be cash-based, based on stocks and shares or insurance-based and they carry an annual limit of £7,000. In their first three months on the market, some £7.3bn was invested in ISAs and investment had risen to some £28.4bn by April 2000. ISAs have been criticised over their complex and confusing rules and the lack of consistent and sound advice from banks and building societies. These institutions dominate sales of ISAs so far, but there is increasing awareness of offers from other institutions. Many ISAs are sold via new distribution methods, i.e. over the telephone and online. Their future looks relatively promising, although the initial rush to invest now appears to have tailed off.

Unit trusts offer a relatively low risk investment, with potentially high returns from investing in equities. Pure UK equity funds are the dominant type of unit trust and intermediaries are the most common outlet channel. Continuing strong performance of the equities market will be the main driver of the unit trust market in the future.

Investment trusts, like unit trusts, offer a means for collectively investing in shares. They offer similar returns to unit trusts, but usually at a lower management cost. There are two types of investment trust — conventional, which account for the bulk of the market, and split capital, which have become increasingly popular.

Stocks and shares, or equities, are the basis of unit and investment trusts, but private investors can also trade directly. This is a higher risk method of investment, especially as the stock market has been relatively volatile throughout 1999 and 2000, but the potential rewards can be considerable. Deregulation of the financial services industry has widened the distribution base for stocks and shares, which can now be bought and sold at banks and building societies, via the telephone and through the Internet, as well as by the traditional stockbroker. Internet trading has become popular, especially since being featured in a number of television programmes. However, ease of access does not imply easier profits.

Gilts are marketable securities issued by the Government to raise funds; they now fall under the aegis of the UK Debt Management Office, or DMO, a branch of the Treasury. Gilts have a reputation as one of the safest investments and their guaranteed interest rates make them popular when bank base rates are falling. Gilts are traded by a small group of firms known as gilt-edged market makers, or GEMMs.

The savings and investments market has witnessed great change in the 1990s; increased consumer awareness has come from greater transparency in financial services. Consumers are increasingly willing to take risks and handle their own investments. New technology has been instrumental in informing consumers and offering greater convenience. However, there remains an almost unreachable core group of non-savers, with the financial pressure of families, home ownership, or unemployment. Closer integration of financial products is needed, in the future, to enable non-savers to take part.