Hoarding is most unpopular with the British public as memories of empty supermarket shelves last spring are slow to fade. There are probably still stockpiles of toilet rolls in little visited cupboards. We still have a few jars of fruit purchased during the shopping panic.
But this type of hoarding has little economic consequence compared with the nation’s obsession with cash – and its absurd fixation with the cash ISA.
The Daily Mail ran a good article last week pointing to the need to reform tax incentivized saving. The main thrust is that ISAs are too numerous and choice too perplexing, so that the initial simplicity which attracted people to them, has been lost.
The article suggests that the Cash ISA is losing popularity, but the stats suggest more of a levelling off in demand.
Actually, it is amazing that Cash ISAs have done so well. Rates of return have been negligible as a result of Government policies to flatten the cost of borrowing. And the tax incentivisation has been non-existent for most people. Cash Isas have also been hit by the introduction of the Personal Savings Allowance in 2016. This allowed basic rate taxpayers to earn up to £1,000 in interest a year tax-free, while higher rate taxpayers can earn £500.
So Cash ISAs aren’t doing much more for most people than putting money under the mattress.
Hoarding down the ages has been considered a bad thing, several times in Jesus’ teachings, he introduces stories about people being given opportunities to make money matter, only to “hide it under a stone”. Hoarders get their come-uppance when they get held to account and can show nothing for their opportunity but a return of cash. The parable of the talents should be on Rishi Sunak’s essential reading list before delivering his budget on Wednesday (3rd March).
Investing not hoarding
I’ve written recently about the advantage of investing not hoarding, using these two simple charts. The one on the left shows how most of ISA subscriptions are into cash , the one on the right, shows that the market value of ISAs is mostly from “stocks and shares” ISAs.
The message is clear, money invested over time, delivers more than cash. If Sunak wants to get more money invested in building Britain back after the pandemic and siezing the opportunities presented by Brexit he can do two simple things
- He can close Cash ISAs for new subscriptions
- He can encourage more saving into workplace pensions.
For just as ISAs encourage hoarding, money going into pensions encourages investment. Nest report that 99% of all contributions are flowing into its fully invested default fund and that’s not out of choice , but because of the persuasive power of nudge.
Making money matter
Money on short term deposit creates liquidity, but we have too much liquidity already. Britain is awash with unspent money – money refunded from purchases that were never made. We have saved more during the pandemic than ever before, simply because we have not spent it!
Now is the time for many of us to take the plunge and invest in our futures. Whether that be through ISAs or pensions, the beneficial impact of investing for the long-term is obvious.
It seems that we still see the ISA as the hedged bet – the account that we can access when money is needed and we see pensions as the money for our old age. This accounts for some of the popularity of the Cash ISA, but only some.
The last major research into the behaviour of cash savers in the UK was conducted by the FCA in 2015 (Cash Savings Market Study). The research looked at the capacity of savers to understand the cash products they were using and their ability to switch between them for best advantage.
But the study did not question whether the decisions taken by savers to keep money in cash were good decisions and there is no market data that I can find that tells us how long money is held in Cash ISAs (or other forms of savings accounts). My suspicion is that most sophisticated people look back at their cash savings with a little embarrassment when they compare the interest they have received relative to the market returns from stocks and shares.
But more worrying is that (reading the FCA report), most people adopt a set and go approach and get stuck in cash without understanding the opportunity cost. This is the problem that Sunak could and should address.
The sad fact is that while most cash savings matter hugely to those who hold them, those savings have virtually no impact on the things that matter to Government, – getting Britain back on its feet, reducing the strain of an ageing society and managing climate risk.
We need to stop our hoarding habit and get more of the money we have in cash, back working for Britain, for our later years and to save the planet.