Research shows that UK savers feel more upbeat but are still too dependent on cash for long-term financial needs.
The British are more upbeat about their financial future than they were a year ago. At the same time, they are over-dependent on cash and have underlying concerns about investing in financial markets. This is according to BlackRock’s latest Investor Pulse survey, which interviewed 2,000 people across the UK, of all backgrounds, aged between 25 and 74. This, the first of three articles on Britain’s savings habits, looks in more detail at these key findings.
The third edition of BlackRock’s annual survey reveals that more people in the UK are feeling positive about their financial future (51%) compared to one year ago (47%). That’s probably thanks to an improving economy and strengthening jobs market. The majority of those interviewed were confident about preserving their wealth. They were confident too about being able to pay off their debts, which is a higher financial priority for the British than for other Europeans. When it comes to longer-term saving and investing, however, that confidence starts to ebb away.
The British maintain a sense of individual responsibility for their finances, and 59% say they take their finances seriously. On average, they invest and save over a quarter of their monthly income. Yet the majority say they do not feel comfortable investing in the stock market.
It is widely accepted that a higher level of risk opens up the potential for higher rates of long-term growth. But six in ten people say they are not prepared to take any risks with their money, and only one in five consider themselves active investors. Cash remains the default destination for the bulk of Britain’s personal wealth.
The BlackRock survey illustrates a high emotional attachment to cash. More than half say that having a cash safety net helps them feel more in control of their finances. Other popular reasons for holding cash included:
45% – “I want to be flexible and keep my options open.”
39% – “Having cash makes me feel safe.”
36% – “I am cautious with my money.”
15% – “Cash never loses its value.”
14% – “I don’t know enough about investing.”
It’s not surprising, then, that people hold 68% of their savings in cash, even though they acknowledge they should only be holding half this amount. With one in seven believing that cash never loses its value, it’s clear that some are also overlooking the role inflation plays in eroding the value of cash savings.
Dash for cash
This dash for cash includes a high dependency on tax-free Cash Individual Savings Accounts (Cash ISAs). Six in 10 of those surveyed hold an ISA, yet nearly three-quarters of them have only a Cash ISA.
In spite of record-low interest rates, more people than ever are using Cash ISAs, and so the total invested in them has grown to an astonishing £228 billion. That’s in spite of the fact that the average Cash ISA interest rate is 1.02%¹. A basic rate taxpayer who deposited the full £15,240 annual allowance in the average Cash ISA would save just £31 in tax.
ISAs can, of course, be used to hold stocks and shares, which can be a more effective way of growing wealth over time. New rules introduced last year removed the distinction between the amounts that could be invested in cash and in equities, and boosted the total tax-advantaged amount that people can invest every year.
And yet the survey suggests that people have responded to these changes by holding even more cash. Nearly a third of people said that they are likely to increase the amount of cash in their ISAs, while fewer than one in 10 said that they will increase their equity holdings as a result of the changes. Whilst ISAs have proved their worth in encouraging the savings habit, the attachment to cash means that many individuals are failing to make the most of the long-term tax saving and growth prospects on offer. BlackRock’s research revealed that those who have recognised the benefits of investing in a Stocks & Shares ISA hold more diverse and balanced portfolios overall, with only 28% of wealth held in cash on average.
Only 39% of British people invest for income, typically in bonds, shares and commercial property. It is clear that many are therefore missing out on the ability of income-generating investments to grow wealth through the reinvestment of that income. Investment income is particularly important to anyone planning for retirement. The next article in this series will review British attitudes to their finances in that all-important phase of life.
¹ Bank of England, March 2015
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. Equities do not have the security of capital which is characteristic of a deposit with a bank or building society, as the value and income may fall as well as rise.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief is generally dependant on individual circumstances.