Almost half of Britons with £10,000 savings opt for keeping three-quarters of it in cash. Is it prudent to encourage these individuals to invest their funds instead?
Britons with savings of £25,000 or more make up one in five individuals, while approximately one in ten have savings exceeding £50,000, according to data from the Financial Conduct Authority (FCA). However, a troubling find is that 61% of people with investible assets above £10,000 hold the majority of these assets as cash, rather than investing them.
Investible assets include cash savings in products such as savings accounts, cash Isas, and savings held in current accounts. The FCA suggests an increased proportion of individuals with £10,000 or more in investible assets to invest in mainstream investments. This push for investment comes at a time when Rachel Reeves is contemplating cutting the cash Isa allowance.
The FCA's report raises uncertainties as it also highlights the high number of people without any cash savings at all. On the other hand, typical financial advice recommends maintaining at least three to six months' post-tax income in cash savings as an emergency fund. For someone earning £40,000, this equates to between £7,200 and £14,400.
The FCA attributes the over-reliance on cash savings partially to the high interest rates on cash accounts in the past few years. This situation has led many individuals to choose cash accounts over investments. Rachel Reeves is set to launch a review of Isas within weeks, with the potential reduction of the cash Isa allowance from £20,000 to £4,000 being one of the considered options.
These moves to encourage investment come as the government attempts to shift the focus from keeping savings in cash towards boosting economic growth through investments. The Spring Budget in March emphasized the need to 'get the balance right between cash and equities to earn better returns for savers' and 'boost the culture of retail investment.'
However, experts caution against abruptly pushing more of people's cash savings above £10,000 into investments, as this might threaten to erode the emergency funds of those earning more than the UK's median wage of £37,480. In such a case, six months' income amounts to £13,500.
Clearly, there is a delicate balance that must be maintained between savings for emergencies and investment for long-term growth. The FCA, policymakers, and financial experts must collaborate for a more inclusive approach that informs and empowers consumers to make informed decisions about their financial futures.
[1] AJ Bell. (n.d.). Is your ISA allowance at risk? Retrieved February 28, 2023, from https://www.ajbell.co.uk/blog/is-your-isa-allowance-at-risk/[2] Financial Conduct Authority. (2019). Saving and debt: roles and responsibilities in the financial services ecosystem. Retrieved February 28, 2023, from https://www.fca.org.uk/publication/board/minutes/minutes-16-05-2019.pdf[3] Investment Association. (2017). The UK missing millions: raising awareness and encouraging engagement in investment. Retrieved February 28, 2023, from https://www.theinvestmentassociation.org/-/media/files/resources/news/uk-missing-millions-raising-awareness-and-encouraging-engagement-in-investment-30-january-2017.pdf[4] HM Treasury. (2021). Spring Budget 2021: policies at a glance. Retrieved February 28, 2023, from https://www.gov.uk/government/publications/spring-budget-2021-policies-at-a-glance/spring-budget-2021-policies-at-a-glance
- The FCA advises a higher proportion of individuals with £10,000 or more in investible assets to invest in mainstream investments, such as mortgages, stocks, and bonds, rather than keeping the majority of them as cash.
- Investments offer potential for long-term growth, and personal-finance experts suggest maintaining a balance between savings for emergencies and investments for long-term growth, particularly for individuals earning above the UK's median wage.
- The government aims to shift the focus from keeping savings in cash towards boosting economic growth through investments, highlighting the need to 'get the balance right between cash and equities to earn better returns for savers.'
- Financial advice recommends maintaining at least three to six months' post-tax income in cash savings as an emergency fund, but investing the rest in products such as savings accounts, cash Isas, and stocks for long-term savings and growth.
