(Bloomberg Opinion) -- Got cash? You might feel rather pleased with yourself. Perhaps even a little flush. You can now get well over 4% interest on an instant savings account (up from around zero two years ago). Lock your money away for six months, and 5.3% is easy to come by. Go for a two-year fix and you can have 6%.
That might even go up: The UK's Financial Conduct Authority has told our foot-dragging banks that they are not putting up savings rates fast enough and that progress must “accelerate.” Wonderful isn't it?
Not wonderful enough I'm afraid. Not only is inflation 8.7%, but you have to pay tax on interest income. Let's say you are a 45% taxpayer in the UK, and you earn 5% on £10,000 ($12,839) of savings. Hooray, that's £500! Except you have to pay 45% on that, so you've got £275 left. To maintain the real value of your cash you actually need £870.
What many people in the UK do to mitigate the nastiness is put their money into a cash ISA (you can put in up to £20,000 a year), which makes all the interest tax free. That's nice, but it hasn't gone unnoticed by banks that routinely pay a little less on cash ISAs than savings accounts (you'll use them anyway for the tax advantages). It's also not nice enough — even with the tax saved, you are still getting a negative real return from your cash.
The other thing to try is what UK residents appear to be loath to do — take the cash and stick it in the stock market. A report just out from the Centre for Policy Studies shows we just aren't as into this as people in other countries. Look at listed shares as a percentage of total household financial assets in the UK, and you will see it comes in at under 4%. In most developed countries, it is closer to 5%. That's partly because we like to think that investing in property is the gold standard of long-term capital accumulation — although falling prices and rising regulatory and tax burdens on buy-to-let investors may soon change our minds.
But it is also about our long-term love of cash — we have some £2 trillion sitting in cash accounts of various sorts. That's more than the current value of all the shares in issue of FTSE 100 companies. When we do put money into ISAs, we mostly do it in cash. In 2020/2021, there were 12.2 million ISAs taken out, and 8 million were cash ISAs. Overall, say the FCA, 9.7 million people in the UK have more than £10,000 sitting in cash.
That's far from terrible — everyone who can should have six months' worth of living expenses in cash just in case. But it means that an awful lot of buying power is being eroded every day, and an awful lot of wealth is not being built. It is also worth noting that the Stocks and Shares ISAs that do exist are mostly owned by the better-off. Given that equities do beat inflation over the long-term, this can keep the wealth divide very much alive.
This isn't quite as bad as it sounds. Most workers in the UK have auto-enrollment pensions that will be invested in equities for example; many hold other kinds of collective investments and many manage our own equity-based SIPPs. But it is nonetheless notable that when it comes to the bits of money we control ourselves, we tend to exercise a degree of reckless caution. In trying to protect our wealth, we allow inflation to destroy it.
You don't have to look far to see why. First, we don't trust the big providers. There have been endless public scandals around the provision of equity-related products in the UK. Think of the endowment mortgages of the 1980s. Everyone took out interest-only mortgages and an equity-based investment product at the same time. The growth in the latter was supposed to pay off the former. It often did not.
Then was there was Equitable Life, where again investment returns were unable to match the promises made about them. More recently was the Woodford debacle, in which hundreds of thousands lost both money and confidence in Neil Woodford's badly structured funds. And that's before we start on the endless mini scandals of overcharging and underperforming in the asset management industry. Then add to that the harsh way UK regulators treat investing. For them, all risk is negative.
All of this matters for our wealth and for the financing of markets: UK companies wouldn't mind the spare £2 trillion heading their way. It also matters for the depth and liquidity of UK stock markets. And it matters for democracy. Owning shares — and knowing that you own shares - gives investors a tangible stake in the economy and in capitalism itself.
There are endless ideas on the go to encourage UK savers back into the market and to make UK markets more attractive. The CPS suggests a public awareness campaign alongside recognition from regulators that investing is on balance a good thing. There is also an excellent case for looking at the shocking burden of taxation on the investing public — and in particular at stamp duty, which makes trading equities in the UK more expensive than anywhere else in Europe.
However, probably quicker and easier than all of these would be simply to combine cash ISAs and stocks and shares ISAs into a single entity. British people understand and love ISAs, but we hate admin. Make them one so we can move in and out of interest-bearing cash accounts and equities without filling in any forms, throw in an awareness campaign, and you might find the job is done. For a little extra oomph, there could be a limit on how much cash can be held long-term in an ISA — say £25,000 — with everything over that needing to be invested within 12 months. Add in an idea from Miton's Gervais Williams that some of that invested money (say 25%) should have to be housed only in the UK (in return for tax relief offered by the UK taxpayer), and the government may find it has killed many birds with one regulatory stone — simplified structures, deepened UK capital markets, less wealth inequality and, with a bit of luck, a new generation of enthusiastic capitalists along the way.
If there was ever a time to do this, it's right now — when inflation is high but real returns on cash are low.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investment, and host of the Merryn Talks Money podcast. Previously, she was editor in chief of MoneyWeek and a contributing editor at the Financial Times. She is also a non-executive director of two investment funds, Murray Income Trust Plc and Blackrock Throgmorton Trust Plc.
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