Savers are sticking with low-return cash strategies rather than investing over fears about volatility and gaps in their knowledge around how to invest, new research suggests – despite the risk to their savings from cuts to interest rates.
In a widely expected move last week, the Bank of England cut the Base Rate to 4% down from 4.25%, the fifth cut since August 2024. Some experts are predicting another or even two further cuts to interest rates before Christmas.
Emma Sterland, chief financial planning officer at wealth management firm Evelyn Partners, said: “This probably signals the end of the road for many savings accounts that currently beat inflation, which was running at 3.6% in June.
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"We can expect to see savings rates reduced in the coming days and weeks, leaving returns on even the best accounts only marginally positive in real terms – especially after the savings tax.”
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Yet more than six in 10 (63%) people surveyed by investing app Stratiphy said they’re more comfortable saving in cash rather than working out how to invest, due to volatility.
Half of people asked (49%) said they are not considering investing in the next year and four in 10 (39%) have also not invested in the past 12 months and don’t plan on doing so in the future.
Scepticism around investing was found to be more pronounced in women than men (56% versus 42%). But older generations are least likely to invest over the next 12 months.
Two-thirds (66%) of those aged over 55 said they’re not planning to invest, though this may reflect a more cautious attitude as they are nearer retirement and don’t want to risk losing their pension money.
Daniel Gold, CEO of Stratiphy, said: “Millions of savers are putting their retirement at risk by placing their money into poor value cash accounts rather than opting to invest and seek potentially superior yields.
“Investing is an important option that people should consider because it can generate higher returns to help fund their lifestyle and retirement – unfortunately too many will realise too late that poor performing cash savings often can’t compete with carefully curated investment portfolios.”
We look at investing versus savings in a separate article.
The benefits of investing
Vanguard data shows that historically, over the long-term, shares rise in value and deliver better returns than cash.
Investing £20,000 in a stocks and shares ISA today with a long-term expected return of 6% could give an investor a pot worth around £64,000 in 20 years’ time.
However, if the £20,000 was left in cash, it could grow to about £33,000 at an expected rate of return of 2.5% over a 20 year period.
The potential difference of £31,000 is a year and a half’s worth of ISA contributions for someone maximising their allowance each year, highlighting the possible reward for taking some investment risk, even amid uncertainty about short-term market conditions.
James Norton, head of retirement and investments at Vanguard Europe, said: “Stock market turbulence can be unsettling, but investing your ISA allowance wisely can lead to better long-term outcomes. Of course, your investments could go down as well as up but history shows that over long periods, shares rise in value and typically deliver better returns than cash.
“The current investing landscape may feel challenging but by staying focused on your long-term goals, you’re more likely to weather short-term market fluctuations, benefit from the potential for growth over time and work towards your goals.”
One option for cautious savers is to temporarily park cash in a money market fund, which is a low-risk investment that gives you a place to hold rather than grow your savings while aiming to give investors a slightly higher return than cash.
Once you feel more confident, you could then consider moving your money into more growth-oriented investments that help you progress towards long-term goals.
How much should I have in savings?
The recommended amount of emergency savings for a household varies between just under £5,000 and just over £50,000, depending on your age and circumstances.
That’s according to calculations by wealth firm Hargreaves Lansdown, based on a couple of assumptions.
While we’re working, it's typically advisable to have cash to cover three to six months’ worth of emergency spending for the household. This rises to one to three years’ worth after we stop work.
As a rough rule of thumb, Hargreaves' research shows on average (mean), households spend £2,062 on essentials each month. So the cost of three months’ essentials is £6,186.
Those aged 60 and over have the lowest costs (£1,392 a month) and those in their 40s have the highest (£2,353 a month). The cost of three years’ worth of essential spending for someone aged 60 and over is £50,112.
We currently have more saved than ever. At 12 per cent, the savings ratio in the UK is well above pre- and post-pandemic levels, according to the Office for National Statistics, having leapt to an exceptional one-off peak during Covid restrictions.
We look at the average savings by age and the average savings by region in separate articles.
The Financial Conduct Authority recently reported that much of this is being held in cash. Some 61% of people with more than £10,000 in investable investible assets held at least three-quarters of these assets in cash, rather than investments.
There is a knowledge gap which is putting off some potential investors – half of people (52%) think they don’t have a strong enough financial understanding to manage their own investments, according to Stratiphy.
Plus six in 10 (61%) say investing feels risky as they don’t have enough information to make proper decisions, rising to up to 74% of those considering investing.
Gold said: “Some of the most common barriers that hold people back are poor financial literacy, a lack of money confidence or simply a lack of time. Simple wealth management tools are vital to support investors to take control of their future.”
