Are you missing opportunities for your 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? Article by Nick Green.

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.

Similarly, savers seemed to be ignoring the Innovative Finance ISA (or ‘IFISA’). This kind of ISA holds peer-to-peer loans, which work as a kind of investment similar to a higher-risk bond. Just 1% of people have an IFISA, yet 3% invest in peer-to-peer loans. This suggests that two-thirds of people who invest this way are unaware that they can save more money by using 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.

Does the neglected LISA deserve more love?

The Lifetime ISA (LISA) continues to be a mysteriously unloved member of the savings family. On the face of it, it should be a favourite: an ISA that can hold either cash or shares, which comes with a 25% bonus on money paid into it, up to a maximum £1,000 bonus per year. The drawback is that there is a 25% penalty on withdrawals made before the age of 60, unless the money is put towards a first home. This makes the LISA a highly specialised savings vehicle, really suited only to first-time buyers and/or those saving for later life.

According to our survey, just 3% of people hold a Lifetime ISA – fewer than own buy-to-let property – and it’s likely that virtually all the LISA savers are prospective first-time buyers. In a typical year there are 350,000 first time buyers, which makes 2 million over a period of six years (a reasonable period in which to save up a deposit using a LISA). Two million is just under 4% of the adult population, so that would easily account for the 3% using LISAs.

This raises the question: is anyone using a LISA to save for retirement? These findings suggest that they aren’t. After buying their first home, savers may be concluding that their LISA has become a white elephant. And they may not want to wait until they are 60 before accessing further savings penalty-free. They can, after all, simply pay the money into their pension. Yet the LISA does retain some advantages over pensions. Firstly, the money is accessible in emergencies (albeit with that stiff penalty) and more importantly, withdrawals from a LISA are not taxable (whereas pension income is). So there are considerable benefits for savers who want to use LISAs as a supplement to their pension, and who continue to save into them even after they become homeowners.

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.

A financial adviser can help you choose the most effective investment strategy for you. They’ll ensure you don’t take more risk than you can afford, while selecting the funds that offer you the best opportunity for building your money and achieving your goals.