Britain has a problem. Millions of people are holding money in cash savings, and as a result are losing out on the potential long-term returns from investing.
More than half of adults, 58 per cent, and equivalent to some 31.4million people are unwilling to face short-term losses on investments because they have low ’emotional’ capacity for risk, new data from Interactive Investor reveals.
Of course, watching your hard-earned cash fall in value when invested is tough to take, and for many this money is needed in case of emergencies, or simply to pay for day-to-day expenses.
However, a third of those who said they didn’t have the emotional capacity to take investment risk, as many as nine million people, do have the financial resilience to do so.
Interactive Investor said this leads to these people ‘under-investing’, with 71 per cent of the 3,000 people surveyed owning no investments outside of their pension.
Data from the Bank of England reveals that in May an eye-watering £280billion worth of cash was sitting in UK bank accounts earning no interest
Richard Wilson, chief executive of Interactive Investor, said: ‘Our research has unearthed a safety-first instinct among savers that presents a serious challenge for the UK.
‘Millions of people have the financial capacity to invest, but don’t believe it’s worth the risk – over a lifetime that’s likely to have a serious impact on their financial resilience.
‘The dangers of not taking any risk are fast climbing up the political and regulatory agenda, and analysis shows that Britain has the lowest levels of equity ownership outside of pensions of any G7 country, with a disproportionate amount in cash and property.’
In fact, as few as 12 per cent of people have a high emotional capacity for risk.
A slightly higher proportion, 19 per cent, had a high risk tolerance. That phrase refers to how willing people are to accept the possibility of losses in favour of higher returns in the long term.
Still, around 57 per cent of people still scored low for risk tolerance, meaning that they aren’t willing to take risks for rewards in the long term, even when financially stable.
Greg Davies, head of behavioural finance at Oxford Risk, said: ‘Most people invest too little and take less risk than they could safely afford. This isn’t about logic – it’s about emotion. Emotional discomfort with short-term market ups and downs leads even financially resilient investors to underinvest.
‘For those with high financial capacity, the emotional gap is often greatest: they could afford to aim higher, but their feelings hold them back.’
Data from the Bank of England reveals that in May an eye-watering £280billion worth of cash was sitting in UK bank accounts earning no interest.
The Chancellor, Rachel Reeves, has launched a campaign to promote retail investing among ordinary people, promoting investing over holding large sums of money in cash.
Meanwhile, ‘targeted support’ reforms will come into play next year, offering tailored recommendations based on what people in similar financial circumstances are doing with their money.
Along with this came fears that the Chancellor would scrap the cash Isa in a bid to push more towards investing.
On the news that this wouldn’t be the case – for now at least – savers breathed an audible sigh of relief. At the same time though, many resigned themselves to continuing to miss out on much higher returns.
Interestingly, just three per cent said they would have a higher tolerance for investing if cash Isa tax benefits were slashed. Meanwhile, 41 per cent said they would invest if they had more money, while 16 per cent said they would do so if they understood investments better.
While it Is recommended that savers only invest cash that they can afford to lose, as well as making sure that they build up an emergency pot and cash savings before doing so, many are sitting on cash pots earning no interest.
Even when held in high interest accounts like cash Isas, the value of cash savings is gradually eroded as inflation outpaces the rates paid out by banks.
Craig Rickman, personal finance expert at Interactive Investor, added: ‘While people should only take on as much risk as is right for them, short-term emotional barriers often mean we don’t take the risk that’s right for our long-term needs.
‘We urgently need radical action to address this or risk more people scraping by in retirement.’
DIY INVESTING PLATFORMS
AJ Bell
AJ Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing and investment ideas
interactive investor
interactive investor
Flat-fee investing from £4.99 per month
InvestEngine
InvestEngine
Account and trading fee-free ETF investing
Trading 212
Trading 212
Free share dealing and no account fee
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
