Many Brits Still Missing Opportunities for Their Money

People in the UK still have good saving habits, with 8 out of 10 households managing to put away at least something every month. But low interest rates and an aversion to risk have left many losing money to inflation. Can a nation of savers learn to invest?

Brits are better at saving than they think, but most are only one step away from using a savings jar or keeping money under the mattress. Despite the popular image of a debt-ridden society of spendthrifts, around 8 in 10 people are adding to their savings every month, even if by just a little. Meanwhile 4 out of 10 households have built up substantial money reserves. However, despite these good habits, savers are failing to make the best use of their money by exploring more effective ways to grow it.

This is according to new Unbiased research, which found that cash savings are overwhelmingly preferred above any other form of investment – particularly those considered to be more ‘risky’. Despite the interest rates on cash being at historic lows, savers on average keep 80% of their money in cash form, and many hold all of it in cash. Moreover, 27% of people keep all their money in current accounts (which pay virtually no interest) without even having a separate savings account. And while 73% of people do have a cash savings account and 42% have a cash ISA, just 16% use a stocks & shares ISA – which is nevertheless the most popular alternative to cash.

ISA uncertainty leaves savers stuck on cash

The continued popularity of cash ISAs is noteworthy, and may be a clue to understanding people’s wider saving habits. Since April 2016, interest on cash savings has been effectively tax-free. A saver can earn £1,000 of interest on ordinary (non-ISA) cash savings before having to pay tax on it, which at current savings rates of around 0.5% interest would require savings of £200,000. Therefore the main advantage of cash ISAs – tax-free interest – no longer applies in most circumstances. Cash ISAs are effectively no better than ordinary savings accounts until interest rates rise significantly (at 4% interest, people with savings above £25,000 would start to be taxed on their interest). Some non-ISA accounts may currently offer better rates.

Savers may be making the assumption that ISAs are ‘just better’ without thinking too hard about the reasons why. Yet despite still carrying a torch for cash ISAs, savers are largely shunning stocks & shares ISAs and other related products, including the Innovative Finance ISA and the Lifetime ISA.

Interestingly, holding stocks & shares outside an ISA is almost as popular as the ISAs themselves – some 12% of savers have non-ISA shares. But given that only 16% of people have stocks & shares ISAs, this is a puzzling figure. Some investors may exceed their ISA allowance and so have to hold additional shares outside their ISA. But according to the research, only 4% of savers put away more than £2,000 per month – the amount they would need to max out their ISAs. Clearly, not all of the 12% who hold shares outside an ISA can have reached their ISA limits. The conclusion is that these investors are needlessly keeping their shares outside an ISA and paying tax unnecessarily on the gains. This may simply be because they don’t realise they can place these shares inside an ISA.

Clearly, savers are very aware of ISAs, given than 42% of them hold the cash version. But there’s growing evidence here that they may not be fully aware of exactly what an ISA is or does. Brits are continuing to pay into their cash ISAs more out of habit than because they think they are the best option. Meanwhile a majority are ignoring the potentially better opportunities available.

Successful savers may need investment advice

Many Brits are still struggling to save. Around 20% aren’t saving at all, with less than £20 to spare at the end of each month. This includes the 7% who regularly spend more than they earn. Overall 58% are saving less than £100 a month – but the flip side of this is that four in 10 are regularly saving £100 or more, and around a third save between £100 and £200 a month.

This discipline has delivered clear benefits. Four in 10 have saved up more than three month’s earnings, enough to cope with a major crisis such as a job loss. A further 14% have at least a month’s pay stashed away, so have a cushion against unexpected bills. And a quarter of savers in our survey claim to have built up the equivalent of more than a year’s income.

Given than nearly half of households find themselves in a financially resilient position, it’s all the more puzzling why so few are exploring better options for their money. There is of course the perception that cash is ‘safe’ and risk free – coupled with a mistrust of stocks and shares as being both volatile and harder to understand. However, cash remains at risk to losses from inflation, and over longer periods can significantly lose value. Savers with large amounts of spare capital – that is, more than they would need to access quickly in an emergency – should therefore be more open to non-cash alternatives as a way to preserve and increase the value of their nest eggs.

If you would like to talk about any of the issues in this article or need more general help with your finances, please get in touch with us.

This article first appeared on Unbiased.