RateSetter-backed report proposes reforms to end “cash bias”
NEW RESEARCH backed by RateSetter has urged the government to take measures to end the “cash bias” in UK savings behaviour.
The report, undertaken by the Social Market Foundation think tank and supported by the ‘big three’ peer-to-peer lender, found that over 26 million British adults do not hold adequate pension savings.
It also said that savers are holding more than £200bn in cash above and beyond the ‘rainy day’ level – which is defined as three months’ worth of income.
This means that over the last five years they have lost out on £40bn of returns if they had invested in P2P loans, or £94bn if they had invested in the FTSE 100, the research claims.
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“The UK’s problem is not just the amount of saving that households undertake, there is also a wider problem with the behaviour of those who do actually choose to save,” said the report, which was released on Tuesday.
“This is typified by a bias for “riskless” and easily accessible asset classes which leads to a reliance on current accounts, cash savings accounts and cash ISAs for very large proportions of overall savings portfolios.
“This reduces the returns to individual savers and, in the current low interest rate environment, often means that savers are seeing their savings lose value in real terms.”
The report suggests that regulators and government should consider whether the Financial Services Compensation Scheme (FSCS) could be reformed to encourage portfolio diversification. It argues that the costs of the scheme amount to an “industry levy” and questions the need for the recent increase to the guarantee threshold of £85,000 of cash deposits.
“The warnings for investment products required by the Financial Conduct Authority emphasise the risk and potential losses that may come from investment,” the report added. “In contrast, there are no warnings that money in cash savings products may well lose value in real terms and these products regularly promote the safety of the FSCS.”
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The report also criticised recent ISA reforms, which remove the requirement to hold a portion of yearly subscriptions in non-cash ISAs.
“This has led to a fall in the proportion of funds flowing into non-cash ISAs, without this fall, investment in non-cash ISAs might have been £2bn higher last year,” it said.
Other suggested policy changes included opening up infrastructure investments to consumers with the launch of a new ‘Britannia Bond’ and a ‘Fund at Fifteen’ scheme to encourage young people to invest.
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“It is clear that an alarming number of people are not saving at all, but in addition, even those that are diligently putting money away are being short changed by holding their money in close-to-zero return cash accounts,” said RateSetter’s chief executive and co-founder Rhydian Lewis.
“Moving surplus cash into investments like P2P loans, and accepting some risk in exchange for the prospect of better returns, could have added tens of billions of pounds to people’s wallets and purses over the last five years, which might in turn have spurred them on to put even more money away.
“The government should make sure the savings and investment policy framework itself is not acting against the best interests of savers by discouraging them from putting their money to work in assets such as equities, bonds and P2P lending.”
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