Realising the benefits of investing to achieve long-term goals

More exciting, however, is the new stuff being lobbed over the transom. There’s the Pensions Commission, and a raft of reforms designed to funnel money out of cash savings and into investments.

Here’s some context to help separate the signal from the noise.

The government is looking for growth and to inject capital into the UK markets. Fund flows into London-listed mandates have been declining for months, and new listings in the UK’s IPO space have dropped to their lowest level for a half-year since records began in 1995.

No-one wants to use the word bleak at midsummer, but this does not signal health or confidence.

At the same time, global trends in personal finance show that people are holding a significant proportion of their wealth in cash. Vanguard reports this month that an estimated £1.7 trillion is sitting in cash savings across the OECD; the same report suggested that in the UK there is potentially £242 billion that could be turned towards both the government’s and individual citizens’ long-term financial goals.

Do the markets have a right to people’s money? Of course not. But we should ask why and how we might nudge this cash into investment and consider who might benefit.

The savings cash-pile has accumulated because of policy, regulation and broad economic patterns on one hand, and financial education and behaviour on the other. Cynics might say the government has just identified a new reservoir of money to tap. Banks and building societies have pointed out that this money isn’t inactive, it circulates through their lending activities too. That said, the Treasury has two motives for seeking to turn savers’ money towards the market.

First, the government – and surely everyone else – wants to reinvigorate the economy, to foster growth and instil confidence, though the jury is out on how much this will move the dial.

Second, individuals holding money in cash accounts are not getting the same long-term return they might realise if they invested instead. This is a problem as personal savings, and taking responsibility for maximising them, become increasingly important as public finances deteriorate and defined contribution pensions are now the norm.

To be clear, holding assets in cash isn’t intrinsically bad – we frequently advise clients to do so. Your emergency fund of three to six months of living expenses needs to be in an easy-access account. As clients approach retirement, we increase the amount they hold in cash – often within pension or other investment wrappers – to protect from market events as they approach drawdown or the purchase of an annuity. At this stage we suggest having 12-18 months of living expenses available – not a small amount of money.

But the Cash ISA is a subject of speculation. They are vastly popular because they are useful for short-term saving goals – easy to set up, easy to withdraw from, and a low-risk tax-wrapper shielding profits from Income Tax and Capital Gains Tax. If changes come, they will be to the annual tax-free allowance.

Since ISAs arrived in 1999 the allowance for adult account holders has risen from £4,000 per annum to a grand £20,000. This can be shared amongst all members of the ISA family – the Stocks and Shares ISA, the Lifetime ISA and the Finance ISA, each with different rules, risks and rates of return.

The most straightforward change to divert savings towards investment would be to reallocate the allowance across other types of ISA, stipulating a certain portion must go to an Investment ISA.

However, this is when you slam into the two major barriers to investment – risk and cost. For example, opening a Stocks and Shares ISA involves declaring your awareness of the risk, being comfortable with it, and paying a percentage fee to your ISA provider. While you can make withdrawals from a Stocks and Shares ISA instantly, exposure to market falls means you are more likely to realise expected returns over a longer period – most experts advise a minimum five-year investment, but this is the kind of decision you might wish to seek more reassurance and advice on.

So far, the Cash ISA remains untouched; it’s now incumbent upon government and the advice profession to make the case for investment to help people with their long-term goals, and to show the benefits rather than be accused of making another cash grab.

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