After the credit splurge, a savings surge

Thrift is set to come back into fashion over the next 10 years as people tire of carrying large debts and try to set aside more money to fund retirement, research out today suggests.

A report commissioned by the Skipton Building Society predicts that personal debt will continue to rise strongly over the next few years from £1 trillion to £1.6 trillion, but then a "savings renaissance" will kick in.

Indebtedness has soared over the past 10 years in response to falling interest rates, rising employment and booming house prices, which required bigger mortgages.

While lower interest rates have made debt more affordable, low inflation means the burden of the debt is being eroded far more slowly than in the past.

"In what will be a radical shift in attitudes towards savings, driven primarily by pension underfunding, people will change their behaviour to use additional income, like bonuses, windfalls or inheritance, to boost savings - rather than spending on consumer goods, services and luxuries," the report says.

It predicts that people will be forced to postpone retirement as debt-servicing costs eat away at funds that would otherwise be put into pensions.

The report forecasts significant social changes. With the cost of raising a child set to exceed £100,000 soon, it says many couples, particularly those who have left university with heavy debts, might decide not to have children.

For some, the burden of debt may become so acute that they change their lifestyle. Some will ignore the temptations of a materialistic consumer society in order to avoid further debt, the report predicts.

As a result, downshifting - already a reality for many disillusioned urbanites - will see more people trading down their house size, location and mortgage costs in order to opt for a simpler, more cost-effective lifestyle.

"Over the decades, we've shifted from a culture of thrift to a culture of spend and now a culture of debt, where our incomes cannot keep up with our lifestyles," said Skipton's spokeswoman, Jennifer Holloway.

"As a result, we predict a future shift to a 'savings renaissance', where people once again save up to buy what they need and re-evaluate the cost of what they desire in order to make lifestyle choices that fit with their finances," she added.

Household debt levels in Britain are equivalent to 139% of household incomes, a figure likely to rise to 150% by 2010, the Skipton report says. While the current figure is high by international standards, countries such as Australia and the Netherlands are already at 150%.