Earlier this year during the World Cup, a large advertising hoarding graced the station where I arrive in London every weekday. It was for a betting company, exhorting punters to have a flutter on the footie.
On a different part of the station concourse was another billboard, advertising an investment product. “Speak to your financial adviser,” it said. It included several prominent warnings: Your capital is at risk, you might get back less than you put in, past performance is not a guide to the future.
The commuters of southeast Essex might logically draw the conclusion that gambling is a perfectly reasonable thing to do — but that investing is complicated, risky and likely to lead to you losing your shirt.
Changing the perception of risk (or relative risk) among consumers is a key recommendation in a thought-provoking new paper by the Social Market Foundation*, a think-tank.
The backdrop is a familiar one. Savings rates in the UK have been on a downward trend for years. Among advanced economies, only Greeks save as little as Britons. We are living longer, yet the twin pillars that once supported retirement saving — the employer and the state — are weaker than they were. What savings we do have tend to be concentrated in cash, a terrible long-term asset. A large and worrying gap is opening up.
Katie Evans and Emran Mian, authors of the report, suggest that more savers might become investors if promotional material focused on long-run annualised returns, rather than year-to-year ones, which tend to highlight the volatility of markets. Presented this way, investing is a no-brainer: equities with dividends reinvested have returned about 5 per cent a year for the past century (after inflation but before costs), vastly outstripping the returns from cash.
What else? They also advocate the removal of stamp duty on shares for retail investors and the creation of a £2,000 additional Isa allowance for bond investment. I can see the rationale for both, but doubt either would make much difference. The vast majority of savers do not even use up their current annual Isa allowance, and I don’t think that stamp duty is a big factor putting people off investing.
They suggest that financial education continues through key stages of adult life, in classic “nudge” fashion. Getting a national insurance number, applying for a student loan or getting a first job should all be triggers for conversations about money. This seems a very sensible and low-cost proposal.
More controversial is the idea that there should be a window for accessing pension savings at age 35. The rationale is that this is the age when income pressure is at its most acute and people are mostly likely to give up contributing to a pension. Allowing limited access would also get around the perception — widespread among younger people that pensions are a “black box” where your money is locked away for decades.
The counterargument is obvious. Pensions are for income in retirement, not for a new car or a kitchen extension, and tax relief on the way in should be balanced by tax on the way out, a principle that recent reforms have already eroded. Nevertheless, it’s an interesting idea in an era when the old distinction between “work” and “retirement” is blurring.
There are two issues I think the report could have looked at in greater detail. One is the behaviour of companies. In aggregate, UK companies have very high cash balances, they can borrow extremely cheaply and they pay one of the lowest corporate tax rates in the OECD (if they pay tax at all). Yet the state subsidises low-wage jobs through in-work benefits like tax credits. This is daft. Put bluntly, many people need to be earning more before they will invest — and many companies could afford to pay them more.
The other is the unique role of housing, which hardly got a mention. Forget cash, shares or bonds: property is Britons’ preferred savings vehicle. Again, this is perfectly rational. Housing is tangible and easy to understand. You can live in it while it appreciates, saving rental costs. No bonus-hungry executive will mess it up. Mortgage debt has never been cheaper. House prices have performed fantastically in many parts of the country and the government seems determined to keep it that way.
Of course, houses can be tricky to sell, their prices may one day fall, or rise by less than inflation, or they may generate only small real returns once the cost of finance over long periods is included. But you won’t catch many people talking about that.