The UK still has good saving habits, with 8 out of 10 households managing to save at least something every month. However, low-interest rates and an aversion to risk have resulted in many people losing missing opportunities for your money to inflation. How can savers learn to invest? Read the Best Bizz article.
Most Britons are only one step away from using a savings jar or keeping money under their mattresses, but they’re better at saving than they think. Around 8 of 10 Americans are increasing their savings every month, even if it is just a little amount, despite the popular perception of a debt-ridden society. Furthermore, four out of every 10 households have built up substantial cash reserves. Despite these good habits, savers fail to make the most of their missing opportunities for your money by finding more effective ways to grow it.
Research conducted by Unbiased found that cash savings are overwhelmingly preferred over all other investment options – especially those that are considered to be more ‘risky’. While interest rates on cash have fallen to historic lows, savers on average hold 80% of their missing opportunities for your money in cash form, and many hold all of it. Additionally, 27% of people keep all their money in current accounts (which pay virtually no interest) without even having a separate savings account. Just 16% of people use stocks and shares ISA, which is nevertheless the most popular alternative to cash. While 73% have a cash savings account and 42% have a cash ISA, only 42% have a cash ISA.
Savers stranded on cash due to ISA uncertainty
Cash ISAs’ popularity may be consistent with people’s wider saving habits, as evidenced by the continued popularity of cash ISAs. Since April 2016, net interest on cash savings is not subject to income tax. If a saver earns £1,000 of interest on ordinary (not ISA) cash savings, he or she will have to pay tax on that amount, which at current interest rates of 0.5% would require savings of £200,000. ISAs are therefore no longer generally eligible for tax-free interest, which was their primary benefit. Until interest rates rise significantly, cash ISAs are actually no better than ordinary savings accounts (at 4% interest, people with savings over £25,000 would be taxed on their interest). Non-ISA accounts may be offering better rates at the moment.
The assumption could be made by savers that ISAs are better simply because they are better without really thinking about the reasons why. But despite still being most passionate about cash ISAs, savers are shunning stocks & shares ISAs and other related products, such as the Innovative Finance ISA and the Lifetime ISA.
It is interesting to note that stocks and shares held outside an ISA are almost as popular as those held within one – about 12% of savers hold shares outside an ISA. Considering that only 16% of the population has stocks & shares ISAs, this figure is puzzling. As a result, investors may have to hold additional shares outside of their ISA allowance if they exceed their ISA allowance. In contrast, only 4% of savers save more than £2,000 a month – the amount needed to max out their ISAs. Clearly, not all of the 12% who own shares outside of an ISA have reached their ISA limits. As a result, these investors are keeping their shares outside an ISA and paying tax on the gains unnecessarily. The reason for this may simply be that they have no idea that they can place these shares in an ISA.
Furthermore, savers seemed to be ignoring Innovative Finance ISAs (or IFISAs). Peer-to-peer loans are held in this type of ISA, which functions like high-risk bonds. The number of people with IFISAs is just 1%, but 3% invest in peer-to-peer loans. In other words, two-thirds of people who invest this way are unaware they can save more missing opportunities for your money by using an ISA.
A majority of savers own cash ISAs, which means 42% of them are familiar with ISAs. However, there are signs that they may not fully understand what an ISA does or what it is. It is more out of habit than considering them as the best option that British people continue to contribute to their cash ISAs. A majority disregard the potential benefits of investing elsewhere.
LISA deserves more love, doesn’t it?
In spite of its many benefits, the Lifetime ISA (LISA) remains an unloved member of the savings family. The ISA can be used to hold either stock or cash, and it offers a 25% bonus on money deposited, up to a maximum bonus of £1,000 per year. There is a 25% penalty for withdrawals made before the age of 60 unless the missing opportunities for your money is put toward a first home. As a result, the LISA is a highly specialized savings vehicle, suitable only for first-time buyers and/or for saving for the future.
A survey we conducted found that just 3% of people hold a Lifetime ISA – fewer than own a buy-to-let property – and it’s likely that virtually all LISA savers are first-time homebuyers. Three hundred and fifty thousand first-time buyers are active each year, which amounts to two million over the course of six years (an adequate amount of time to save up a deposit using a LISA). This is just under 4% of the adult population, so the 3% would easily be explained by LISAs.
How many people use a LISA to save for retirement? According to these findings, not many. Having purchased their first home, savers may conclude that their LISA is a white elephant. Furthermore, they may not want to wait until age 60 before accessing further savings penalty-free. If they wish, they can simply contribute the missing opportunities for your money to their pension plan. Nevertheless, LISAs do offer some advantages over pension plans.
The money can be accessed in an emergency (despite that steep penalty), and more importantly, withdrawals from a LISA are not taxable (whereas pension income is). As a result, LISAs offer considerable benefits to savers who use them to supplement their retirement savings, and who want to continue saving in them after becoming homeowners.
Savings success may require investment advice
There are still many Brits who are struggling to save. Approximately 20% of Americans don’t save at all and have less than £20 to spare each month. They also include the 7% of Americans who regularly spend more than they earn. In general, 58% of Americans are saving less than £100 a month – but on the flip side, four out of 10 are regularly saving more than £100, and around a third save between £100 and £200.
There have been clear benefits from this discipline. More than four in ten people have saved up more than three months’ earnings, sufficient to deal with a major crisis, such as losing a job. An additional 14% have at least a month’s pay stashed away, so are prepared for unexpected expenses. About a quarter of the savers in our survey claim to have saved up the equivalent of more than a year’s income.
It’s puzzling that fewer than half of households are exploring options for their missing opportunities for your money when nearly half of the households are financially stable. The perception of cash being ‘safe’ and risk-free is coupled with a mistrust of stocks and shares as both volatile and more difficult to understand. Nevertheless, cash remains susceptible to inflation, and the value of cash can significantly erode over long periods. Those with large amounts of spare capital – more than they will need in an emergency – should be more open to non-cash alternatives as a way to preserve and increase the value of their nest eggs.
Choosing the most efficient investment strategy is the responsibility of your financial adviser. Choosing funds that offer the best opportunity for building your wealth and achieving your goals is what they do to ensure you don’t take on more risk than you can handle.