Cash deposits from UK savers reached a record high in 2017, but consumers are missing out on more than £30 billion in income per year, according to research from Janus Henderson Investors.
Despite £1.32 trillion being tied up in cash savings vehicles – such as cash ISAs, current accounts and easy-access accounts – stepstoinvesting.com, a first-time investor website run by the investment trust team at Janus Henderson, found the interest earned by those accounts fell to a low not seen in more than 30 years.
The team say the the last time interest income earned on cash was this low was more than 30 years ago. In 2007, interest income was seven times higher than in 2017.
As a result, savers missed out on £31.2 billion worth of extra income last year alone, compared to if their money had been deposited in UK equities instead. “The amount of potential income that savers are missing out on is staggering,” says Simon Longfellow, head of stepstoinvesting.com.
“This is happening because most savers are not aware of the potential benefits of investing or do not feel confident enough to put their money into these higher-yielding alternatives. As a result, cash balances have continued to grow bigger and bigger as a proportion of national household income.”
Cash holdings were equal to almost an entire year of UK disposable income, according to the data. In contrast, 20 years ago an individual's cash savings were equal to just eight months of income.
How to Solve the Cash Problem
The obvious remedy, according to Longfellow, is education. The investment industry currently “speaks a language that beginners just do not understand”. “To them, the risk of investing can often just seem like a bet on black or red.”
The alternative option for those savers is to transfer their cash holdings to a stocks and shares ISA. As with cash ISAs, stocks and shares options are tax free savings vehicles that allow consumers to invest in shares of listed companies as well as collectives such as open-ended funds and investment trusts.
A general rule of thumb on a rainy-day fund is around three months’ worth of income. According to the research, this would mean the number should be closer to £340 billion, meaning there a surplus £953 billion sitting unproductively in cash accounts.
“If you have anything above and beyond [three months of your salary], you should certainly consider investing,” adds Longfellow.
That said, investing is riskier than cash with investors needing to have the ability to stomach volatility, especially in the current environment. Therefore, this option should only be taken if you can keep your cash tied up for a longer period. And interest rates are currently on their way up, so rates should improve with them, albeit with a time lag.
Charlotte Nelson, finance expert at Moneyfacts.co.uk, points out that stocks and shares ISAs are not suitable for everyone. “Savers looking for a more stable home for their tax-free savings will find a cash ISA a better option,” she tells Morningstar.
“Stocks and shares ISAs are aimed at producing longer-term growth, meaning that over the short term savers can potentially lose money. Therefore, savers with a short-term goal in mind, or who are just saving for emergencies, might be comfortable investing in a cash ISA.
“Savers unsure about which option is best for them should seek the advice of a financial adviser to make the right choice.”
