The British are decent savers, but bad investors

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Those Britons lucky enough to have spare cash, even after draining their pay cheques for rent, food and commuting expenses, are actually pretty good at stashing it away. Over 40 per cent of UK adults had savings above £10,000, according to a recent survey from the UK’s Financial Conduct Authority. The problem is a lot of it is sitting in bank accounts, growing slowly as prices ratchet higher with inflation. British households, and the economy, would be better off if more of it went into higher-returning, long-term investments.

Barclays Bank estimates that 13mn UK adults are holding £430bn of “possible investments” in cash deposits. That is based on individuals with cash savings above £10,000 and after taking account of retaining six months’ income in cash. To be fair, many are trying to build accessible deposits to pay for ever-appreciating house prices. Real estate is, after all, a solid investment. And, through workplace pension pots, they are putting something away for retirement. Higher interest rates have also boosted pandemic-era cash-piles in current or savings accounts.

Still, UK savers seem reluctant to allocate savings for potentially higher yielding, liquid financial investments, such as stock index funds. For measure, a £2,000 deposit tracking the MSCI World equity index a decade ago would have more than doubled in value — not a bad step up towards a first house deposit. Few savings accounts can match that.

Cultural factors could be at play. Over 60 per cent of Americans invest in the stock market, but fewer than one in four Brits do. Some analysts reckon Britain’s state support for healthcare and pensions puts less onus on financial self-sufficiency. Others point to its recent economic woes. Less buzz around domestic companies could contribute to a general lack of interest in equities. In recent decades, the FTSE 100 has delivered lacklustre returns relative to other global benchmarks.

But Brits can get exposure to booming tech stocks and diversified global stock and bond portfolios via investment platforms. The problem is knowing what’s best. There are thousands of retail funds to chose from. Choice is good. But when many Brits feel they do not know how to compare investment products, it causes paralysis. Plenty are also put off by the perceived risks, yet are unaware that their own pensions have exposure to the stock market. The UK’s byzantine tax code adds to the confusion.

What’s the answer? Rebooting UK plc will take time, but other improvements could assist. Boosting access to cheaper financial planning support is key. Regulatory reforms to enable providers to give personalised investment suggestions and nudges to nervous savers holding significant levels of cash might help. Simplifying the documentation required for basic investments, as well as the range of products, would make a difference too. Platforms could also improve online signposting and comparison tools for entry-level investors.

Some may gripe at the travails of Britain’s cash-rich savers. Indeed, for those living from pay cheque to pay cheque spare cash is a luxury. Vulnerable households still need support to build nest-eggs. But one way to help everyone become better at both saving and investing would be to improve Britain’s financial literacy. Recent research suggests around three-quarters of the country falls below a benchmark for measuring levels of financial understanding. That compares poorly with other developed economies.

A better awareness of risk, planning, and investment products, from an early age, would help Brits make their savings work harder for them over their lifetime. Education is, after all, one of the smartest investments.