Recent headlines about stock markets in freefall and graphs with downward arrows are not what you would choose as a backdrop to persuading people to move from cash savings into riskier investments.
But that was what the chancellor, Rachel Reeves, was faced with after announcing that a review of cash and shares Isas was on the way.
A week after her March spring statement included confirmation that the government was considering changes to the tax-efficient accounts “to earn better returns for savers, boost the culture of retail investment, and support the growth mission”, Donald Trump put the frighteners on investors with his tariffs announcement.
But while they may have dodged losses linked to recent market gyrations, those who hold only savings accounts have missed out on some serious stock market gains in recent years. Figures issued by the Investment Association at the end of March showed that £10,000 put into a cash Isa five years ago would in effect be worth £8,713 “in today’s money” once inflation was taken into account. By contrast, the same sum put into a stocks and shares Isa that invested in a global equity fund would have been worth £12,249, it said. That figure was issued on 27 March, before the stock market turmoil of the last few days.
Ruth Handcock, the chief executive of the money advice company Octopus Money, says that over most periods, investments have outperformed cash savings.
“The reasons for not investing are not logical,” she says. While everyone needs some cash they can get their hands on in an emergency, “people who only save see the value of their money eroded by inflation”, she adds.
Despite that, figures from the investment firm Aberdeen show that typically, after property and pension savings, people in the UK choose to stash their money on deposit – in a bank, building society, at National Savings and Investments, or one of the new app-based providers.
Aberdeen says UK consumers hold an average of 15% of their assets in cash, compared with 8% in stocks. That compares with 13% for each among French consumers, and with 10% and 33% respectively in the US.
Among the countries the company compared, the UK was not the most cash-heavy – in Japan, 35% of savings were in cash – but British residents had the smallest proportion of their assets in the markets.
Separate research by the Investment Association found that in 2023, only 39% of UK adults were actively investing – which included buying cryptocurrency and other assets.
While not everyone has enough money to put by for the long term, even among those who seemingly do have something spare to put by, there is a high reliance on cash accounts.
So why are we a nation of savers, not investors?
Alexander Joshi, the head of behavioural insight at Barclays Private Bank, says its research has shown there are two main reasons why people stick to cash: “Firstly, they find investing too confusing and complicated. Secondly, they perceive it to be too risky,” he says. “A fifth of UK adults who don’t invest say it’s because they have insufficient knowledge, and a quarter say it’s because investing is too complicated.”
Handcock blames the “paucity of help that’s available” to people who do not know what to do with their money.
Richard Wilson, the chief operating officer at Aberdeen, says the UK has “failed for years to spark a national culture of retail investing – a culture that you see embedded in the US”.
He says there is a need for better financial education.
“We also need a more competitive stock market. That means no stamp duty [tax] on UK shares, and a friction-free, simpler Isa system,” Wilson says. “While Isas have clearly enjoyed many successes, the brand has been stretched too far, and high levels of complexity risk putting people off altogether.”
The government’s plans include a review of Isas, though it has dropped the idea of one designed to incentivise people to put money specifically in UK shares. It is also working with the City regulator on ways to make financial advice more accessible.
It acknowledges that not everyone can afford to invest, and that people should have emergency funds that are easily available and safe. But it wants to increase investment by those who can afford it.
Handcock says Isas could be better set up to encourage investment and that people’s personal savings allowance should be used more to encourage the use of bank and building society accounts. “How do you create the ladder to investing? We’ve relied on the Isa to do that, and people have got stuck at cash,” she says. Instead, the focus could be on stocks and shares Isas. “What we’d then need is help to use it.”
For anyone wavering between investing and saving, this month’s severe stock market turbulence could easily have tipped the scales in favour of a bank or building society account.
Joshi says: “Those who are reluctant to invest may be experiencing ‘confirmation bias’. In simple terms, they are overly focusing on information about investing that confirms their pre-existing beliefs, which might be negative to begin with.”
He says the current uncertainty will naturally make people more cautious when it comes to their money.
“An expectation of rising living costs is likely to make people more conscious of their day-to-day spending, and it may cause them to shy away from risk, especially when it comes to investing,” he says. “In the short term, recency bias is also likely to play a factor, because people tend to overweight the importance of recent events at the expense of their long-term objectives or financial goals.”
However, investing is all about playing the long game. “As they say: time in the market beats timing the market,” Joshi says. “If people are still unsure, one option is to start with small investments to gain confidence and to build from there.”
How can I start?
• Only invest money you don’t need soon. Investments are long-term and you will be able to ride out the ups and downs in the stock markets if you do not need to withdraw the money when things are going badly.
• Instead of trying to pick individual stocks and shares, go for a fund. This means you don’t have to research hundreds of companies to find the right ones, and allows you to spread your money more widely, as you can, in effect, own bits of lots of shares.
• Choosing a low-cost tracker fund is a good place to start if you are not going to put in much money. Tracker funds tend to have the lowest charges – they focus on a certain market and try to follow its performance.
• Invest regularly rather than putting in a lump sum. The best way to avoid any scary losses is to invest regular sums. When the market is lower, you are buying more units for your money and stand to gain when it recovers – so you make a virtue of any dips.
• Investments held in an Isa are not subject to tax. Although you are starting small, you might want to put in more money as you get more confident, and if your choices perform well, you may be grateful you have shielded your gains.
