Why there is a cost to consumers sticking with savings - Sarah Coles

Investment experts are so worried that other people are missing out that they commission all sorts of research into how they can get people more excited about investment. The latest report, by the boffins at Oxera, for The Investing and Saving Alliance, pinpointed problems, and suggested some solutions, but they overlooked what I think might be the most important thing – you.

Clearly a key reason why people don’t invest is the fact they can’t afford to, so the researchers started with those who already had a big chunk of savings. Another sensible reason not to invest is if this money is your emergency savings safety net or you’re going to need to spend it in the next few years. However, of those who knew when they were likely to withdraw their savings, 85 per cent didn’t expect to need it in the following four years, so there was a big chunk of people in this group who could potentially consider investing.

The researchers then dug down into why they weren’t, and found that the main reason was that one in three said they ‘didn’t want to put their money in a risky investment’. It asked a bit more about what people meant by a ‘risky investment’ and discovered that they massively overestimated the potential of losing money over the long term. Those who had picked a cash ISA instead of a stocks and shares one estimated that the chance of losing money over a ten-year period was 30 per cent. Historically the probability of a loss when investing in the FTSE 100 over this period has been 3.5 per cent.

You might think that people who aren’t interested in investment should be left well alone. After all we don’t feel the same need to force people to fish or strong-arm them into gardening. However, there is a cost to sticking with savings, and it’s not widely understood. Of those who expected to hold their savings for five years or more, only 28 per cent said high inflation might make them consider investing. In reality, when inflation is higher, if you have your cash in an easy access savings account, it’s pretty much guaranteed to lose spending power after inflation. If you’re holding your life savings this way for a significant chunk of time, it’s being quietly eroded before your eyes.

The researchers found that the more people understood about the features and benefits of a stocks and shares ISA, the more likely they were to have one, so they also looked at what went wrong when people started trying to find out more. They discovered that large numbers of people found the process time-consuming and complex. More than a quarter found it difficult to work out the differences between different types of ISA or how to choose a fund. Some of the language was a turn off too. A quarter of people found it difficult to understand, and three quarters hated the jargon.

Women were more likely to own up to struggling with some of this: a third of them said they found it difficult to understand. However, this can’t simply be read as a lower level of understanding, because this is self-reported, so we can’t know how much of this is women admitting to it and men not being willing to do so.

Women were also less likely to agree with the idea that ‘people like them’ invested. This is a major hurdle, because those who invested were 40 per cent more likely to agree with this statement. Again, it’s difficult to tell whether this is failure to show people that those in the same position as them invest successfully too – or whether it’s simply because the kind of cliché lots of people think of as an investor – rich men from London – are actually the most likely to invest.

The report tried to find solutions. The Investing and Saving Alliance wants companies to work harder to make things easier. It also wants the rules to change to let them deliver nudges and alerts that are more personalised and therefore more useful. They might, for example, email you letting you know you have too much cash and helping you choose an appropriate investment. At the moment, this kind of thing crosses the boundary into advice under the rules, so unless you’re paying for advice, they can’t do it.

It wants the regulator to make it easier for investment companies to stop banging on quite so much about risk. There clearly has to be a balance, because it’s not in anyone’s interests for people to wander into investment not understanding that they could lose money. However, at the moment it appears as if people are getting a distorted view of how much risk is involved. TISA also wants the industry to find a way of reaching people who don’t have any interest in investment, and don’t think of themselves as potential investors. It looked into what stage in the process people get to before they give up, and discovered that three quarters of people drop out before it starts – because it never even enters their mind to invest.

It means the missing piece of the puzzle doesn’t lie in the hands of researchers and investment companies. In the same way that taking a plant round to a neighbour can encourage them to consider their garden, or showing off your fancy crocheted gloves might persuade them to pick up some wool. At this stage, you’re bound to be thinking that because I work for an investment company, I have a vested interest in wanting more people to invest. It’s a fair challenge, but in reality I personally have nothing to gain whether you decide to do this or not. Meanwhile, someone you know may have a workplace defined contribution pension that means they’re already investing – it’s just that they may not know this, or understand it, or be able to make informed decisions about it when they have to. If you can persuade them to consider the investments they’re already holding, so they can make sensible choices about their future, that would achieve more for them than any research project ever could.

This week NS&I announced that it’s on track to hit its targets. Halfway through its financial year it is sitting on £3.4bn of the £6bn of savings it wants to attract during the year. It has had to boost rates a couple of times to get there – in July and October. However, it has been playing a reluctant game of catch-up, and it’s still not among the most competitive on the market. Unfortunately, there’s also a decent chance it can attract more money without really trying in the coming months. In September, there was a jump in the amount we’re saving overall – we salted away £8.9bn, compared to a six-month average of £5.3bn. There’s every chance that those who have any wiggle room in their budget are preparing for even tougher times ahead by building any savings buffer they can afford. If the trend continues, and October’s rate rise brings more of this cash to NS&I, it could see bigger inflows without having to raise rates again to keep pace with the rest of the market.