What caught my eye this week.
Ours is an age in which bad ideas refuse to die quietly, so no surprise to hear from The Guardian that ministers are again consulting with ‘City bosses’ on cutting the £20,000 cash ISA allowance:
The City minister, Emma Reynolds, called a meeting with senior executives from six of the UK’s largest banks and building societies before what could be one of the biggest shake-ups of individual savings accounts since their creation in 1999 under the then Labour chancellor, Gordon Brown.
The meeting – which included bosses from NatWest, Lloyds, HSBC, Barclays, Nationwide and TSB – was held at the London offices of the lobby group UK Finance on Thursday, and is part of a series of government round tables taking place before a consultation on Isa market reforms.
Continuing the theme of dumb ideas that have already died once, they are apparently also considering reviving the British ISA dead donkey, too.
Look, it’s nice to see Labour and our captains of industry getting together to talk business.
But what a shame they can’t focus on, you know, actual business. Rather than returning again to fiddling with the financial goalposts.
This country seems to have become obsessed with apportioning up who gets to keep how much of what and where – be it a pension, an inheritance, or a lump of cash – rather than growing real wealth in any meaningful way.
It’s like a nation-state scale Lord of the Flies. We’re bickering about divvying up the same dozen special conch shells when we should be building a life raft.
Little Britain
Of course we all have our views about these wrappers and the best uses for them.
But does anyone really think that middle-class Britons keeping a bit too much money in cash when they could own shares in Tesco is what is holding Britain back?
Of course governments do a lot of things at once.
Just because Rachel Reeves is seemingly determined to fiddle with ISAs and even to slap ‘Buy Blighty’ on a poster somewhere, that doesn’t necessarily mean she isn’t hard at work the rest of the time on her AWOL growth agenda.
Does it?
Have a great weekend.
From Monevator
Avantis Global Small Cap Value ETF review – Monevator
Are easier mortgage regulations coming to the UK market? – Monevator
From the archive-ator: Asset allocation and your investment goals – Monevator
News
UK economy grew faster than expected in Q1 – Sky
HMRC toughens stance on wealthy households avoiding tax – Yahoo Finance
One in ten have no savings, financial regulator says – BBC
Treasury holds talks with fintech unicorns about London IPO prospects – Sky
…meanwhile fintechs face resilience test as interest rates fall – CNBC
New bank transfer fraud refund scheme sees 86% of losses refunded – Which
Central London property prices have crashed – This Is Money
Pension savers face running out of money 11 years into retirement – MoneyWeek
The farce of the deal – Apricitas Economics
Products and services
Is it time to fix your savings? – Which
Shops charging illegal ‘restocking’ fees for returns – Be Clever With Your Cash
Get up to £100 as a welcome bonus when you open a new account with InvestEngine via our link. (Minimum deposit of £100, T&Cs apply. Capital at risk) – InvestEngine
Is it about to become easier to get a mortgage? [Probably] – Which
Mortgage rates fall again as product choice hits 17-year high… – Mortgage Introducer
…and two-year fixes fall below 2022 mini-Budget levels… – This Is Money
…but is this new 100% mortgage product a good idea? – This Is Money
Get up to £100 of free trades and pay no SIPP fee for three months with Interactive Investor. Terms and fees apply. – Interactive Investor
Why don’t tradesmen return calls or give quotes? – This Is Money
The ten places where you’ll get the biggest garden for your money – This Is Money
Homes for sale with stylish interiors, in pictures – Guardian
Comment and opinion
Dear HSBC, income does not equal wealth – Simple Living in Somerset
“All the ways I feel poorer than I am” – Ryan Holiday
A good time for the sleeping point story – Phil Pearlman
How Charlie discovered that time wealth can be key to a happier life – Guardian
These two factors tend to drive portfolio success – Alpha Architect
Donald Trump vs Mr Market – Tim Harford
Trouble on the horizon – Behavioural Investment
How to prepare your portfolio for a recession – Morningstar
Handling requests for advice from friends and family – Investment Talk
Go for the gold? – Humble Dollar
The venture capitalisation of culture – Money with Katie
The inescapable principle of comparative advantage – Econlib
Understand US equity return expectations [Research, PDF] – AQR
Naughty corner: Active antics
Airbnb’s second, second act – Spyglass
Terry Smith on Warren Buffett [Paywall] – FT
Thoughts and prayers for Apple – Asymco
Nestle is trying to spin off its bottled water business – Sherwood
Warren Buffett’s $160bn Apple bet: a history – Satpost
Active management is quietly reinventing itself – CFA Institute
Kindle book bargains
Hype Machine: Inside the Cult of Crypto by Joshua Oliver – £0.99 on Kindle
The Price of Money by Rob Dix – £0.99 on Kindle
The Great Crashes: Lessons from Global Meltdowns by Linda Yueh – £0.99 on Kindle
Failed State: Why Britain Doesn’t Work by Sam Freedman – £0.99 on Kindle
Or pick up one of the all-time great investing classics – Monevator shop
Environmental factors
Why are all of America’s biggest cities sinking? – Grist
Car parks could be covered in solar panels to deliver EV charging – This Is Money
Are sailing ships the future of sustainable shipping? – Reasons to be Cheerful
Dangerous clear-air turbulence is worsening due to global warming – Ars Technica
Scars from the world’s first deep sea mining test, 50 years on – BBC
How to grow your own rainforest [Paywall] – FT
Robot overlord roundup
Thoughts on thinking – Dustin Curtis
FaceAge tool can tell your biological age from one photo – Guardian
PR pros discovering how to best influence AI chatbots – Semafor
“We’re definitely going to build a bunker before we release AGI” – The Atlantic
Musk’s AI bot Grok rants about ‘white genocide’ in unrelated chats – Guardian
AI is too busy to take your job – Dror Poleg
Not at the dinner table
Tariffs and manufacturing jobs: three big problems – Agglomerations
Drill, baby, dr…never mind – Paul Krugman
Kayfabe and the trade war – Kyla Scanlon
The end of the rule of law – The Atlantic [h/t Abnormal Returns]
What if the President tries to annex Greenland and Canada? – Reason
Off our beat
How ships escaped the great stagnation – Works in Progress
Taiwan’s double, double toil and trouble [Paywall] – FT
Why do people lie about taking Ozempic? – Guardian
Ending the ‘anger economy’ – More To That
You might live to 100. Are you ready? – Guardian
Silicon Valley billionaires literally want the impossible – Ars Technica
When do pop stars reach their peak? – Stat Significant
A more holistic approach to back pain – Peter Attia
The Red Sea Scrolls unravel the mystery of the pyramids – London Review of Books
A few questions – Morgan Housel
The red door – Ted Merz
And finally…
“Monopoly is the condition of every successful business. All failed companies are the same: they failed to escape competition.”
– Peter Thiel, Zero to One
Like these links? Subscribe to get them every Saturday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.
Typo alert: It’s *Red* Sea Scrolls (recently discovered), not Dead Sea Scrolls, that relate to the Great Pyramid.
I like the idea of a British ISA. I’m a global equity index investor, but if they gave me another 20k a year for U.K. shares only I would happily use it, every year for the rest of my life as long as I have money left after standard ISA. If the main goal is to get more brits investing in uk shares this is the way.
5k allowance would be too small because passive investors would probably just find a way to go ex-UK with their other savings to balance out. Go big or go home.
@Ecomiser — Ack, brain running on auto-pilot. Thank you!
@marc — Of course, but it will definitely not be £20K additional! Maybe they could manage £5K additional, I still don’t think it’s a good idea (complication, encouraging home bias) but it’d be better than damaging the £20K universal.
I recall reading something like 50% of big platform stocks and share ISA holdings are in UK funds anyway! (Possibly in the FT this week? I’m typing on the go so can’t check.) Though I haven’t actually seen a breakdown, so maybe they’re including something like L&G world trackers in this mix.
It would be nice if at One of these meetings they had someone like Martin Lewis (or somebody from a well known money blog) to balance out the thinking.If the idea is really to lower the amount of cash people can hold tax free then as the phrase goes “it is what it is” and they should just admit it.But the idea that people who have avoided the stock market up to this point (or even people who are balancing between the Two) will suddenly use the rest of the allowance in shares seems optimistic.
And with the headlines over the last couple of weeks the stock market looks even less interesting to people who have only held a cash ISA up till this point.
I can also hear the cries of misselling from people who have not invested before when their British ISA drops 20% – 40% for the first time.
I’ve been thinking.. Yes. If the bond markets destroyed the Truss reign, and Labour is running scared of the bond markets, and the bond markets have reigned in Trump…, is this always going to be the way, has it always been …, or is it a mark of every empire/powerful nation that is on the decline..?
Where the UK is now.., seems to be that over the last 40 years, the average joe in the UK seems to have been pushed down the route of more and more risk being attached to whatever they’ve put by, savings wise. And here we are, with a government that itself refuses to invest, yet they want to force people to do so.
@The Investor
The 50% of ISA assets held on Hargreaves Lansdown and AJ Bell’s platform are UK investments (shares and funds) comes from an FT article from 15th May ‘Don’t make ISAs a great British failure’. It’s around 25% at Interactive Investor.
@Trufflehunt
James Carville’s joke about being reincarnated as the bond market:
“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
dates from 1993-94. Was the US in decline at that point?
Terry Smith’s FT article on Warren Buffet is also available free on the Fundsmith website.
https://www.fundsmith.co.uk/media/xo0n0fh5/mnl132_finalpdf.pdf
People holding cash in ISAs are risk averse. They’ll just pay tax on the interest and get less instead. Or maybe a few mugs will pony up for a British ISA with some fat fees. Win-win for Reeves and The City.
While the average Brit may not be financially sophisticated, people aren’t stupid and if they’re getting poorer because of decisions like this, they notice. Telling them to take it for Team GB doesn’t go very far.
I concluded decades ago, the best policy the government can have is not to mess around. The best is the enemy of the good – people much prefer straightforward rules that don’t change to tampering. It’s a surefire way to sap confidence.
@Trufflehunt #5 > seems to be that over the last 40 years, the average joe in the UK seems to have been pushed down the route of more and more risk being attached to whatever they’ve put by, savings wise.
It’s called neoliberalism. In Atlas Shrugged Ayn Rand’s protagonist John Galt summed it up as ‘I am not my brother’s keeper’. Though we should also discriminate between savings and investments, the two are very much not the same thing. Savings are comparable to what the guy in the parable of the talents did when digging his gold into the ground, the other two guys were investors ISTR. I don’t think you can really moan about increased risk to savings over time, what with FSCS requirements being widely advertised. The primary risk to savings is inflation.
As to the bond market, it only intimidates those that want to borrow money from it. In the case of Liz Truss, she wanted tax cuts without saying where the matching spending cuts were, or where the newly discovered money tree was.
The difference was going to come from the bond markets, who levied a moron premium on projected and existing UK gov borrowing, oops. We should note that Thatcher did that the other way round, though she had the free gift of North Sea oil revenue to split the difference that La Trusster didn’t.
Apropos the UK economic growth figures and the trumpeting of them being better than expected, I’m reminded of the publisher of a magazine I used to work on saying (of circulation figures): “Flat is the new up”…
I can see there being some logic to limiting a maximum of maybe around 80% of the overall ISA allowance to be allowed to be deposited in Cash ISAs, to encourage more people to at least *think* about the potential for investing in the stock markets, but a Stocks & Shares ISA is not an appropriate investment for people who are very risk averse, or who don’t have a sufficiently long investment horizon.
And as for investing in British companies specifically? Maybe if we had some innovative and growing companies worth investing in… UK governments, of any flavour(s), need to take a very hard look at themselves and work out what they can do to actually properly help the British economy, and to help discourage the few success stories we have (like ARM) from being snapped up abroad.
We are sadly a pathetic small beer (and stale beer) nation, still living with dreams of faded imperial grandeur which is very long gone, crippling ourselves with the idiocy of Brexit, and further severely hampering any potential for growth by crippling younger generations with huge student debts, ridiculously unaffordable housing and a horrific bloated house price bubble that has needed gradual deflation for far far too long, and an economy (such as it is) that is too centralised on London. “Tis but a flesh wound!” – No, we’re bleeding out all over. Apply some proper medical care (and not just quick-fix sticking plasters) and perhaps then we might be able to turn things around…
@klj You’ll be pleased to hear Martin Lewis was at the meeting. I suspect he was quite pro investing
Very minor typo (sorry): “American’s biggest cities”
Completely agree with the sentiment of this article. Whatever flavour of government we have this country just doesn’t seem to want to grow anymore. It’s like we are stuck in some socialist lite doom loop everyone trying to get as much off the state as they can nobody being allowed or incentivized to grow the pie. As for Martin Lewis I see a post on X awhile ago summing him up. An economic weapon you would drop on your enemy. He is the nations chief whinger.
It is interesting to note that
1) The ISA limit has been £20k since 2017/18, i.e., a long time!
2) In previous years there were different allowances for shares and cash ISAs, e.g. in 2008/09 £7000 share ISA/total allowance and £3k in cash ISA. So there is a precedent for limiting cash compared to equities.
3) The vast majority of people get nowhere near using up their annual ISA allowance (e.g., it doesn’t seem likely that someone on median salary of ~£35k would be able to save 2/3 of their salary each year). In other words, unless the cash limit is really restricted, then most would not be affected.
4) The cynic in me assumes the ‘city bosses’ are looking forward to receiving upwards of 0.1% on the extra amount in S&S ISAs.
5) Cash savings are invested in Britain – old banks, challenger banks and building societies loan money as mortgages and to businesses. However, only about 10% of my S&S ISA is invested in Britain (and that includes the individual gilts).
@Ricardo – had missed that but seems good that someone outside of the Two camps was there. From a very quick search it would seem previously he was sceptical it will make people invest rather than save in normal savings accounts instead.
Only one Q from me re ISA limit speculation: if it happens when will it likely become effective? I ask as for a variety of reasons I prefer to fill my ISA towards the end of the tax year. For similar speculative reasons I brought those actions forward (for the first time ever) last year – to only subsequently be hit with entirely unforeseen “good news” that caused me to scramble a bit.
The old phrase of use it or lose it might need revising to something like use it now or lose it. This is no way to go on – but I guess needs must in the face of increasing levels of stupidity by people who should (but clearly do not) know better! Where do we find these people?
@Al Cam
“re ISA limit speculation: if it happens when will it likely become effective?”
I don’t believe there is any set rule. Could be with immediate effect, or left until the following 6 April. Hedge your bets and put in a monthly amount?
An accepted practice for those in or near drawdown is to hold a number of years expenses in cash or cashlike investments. A cash ISA, for some, may be a good way of holding that amount without having to sell investments to cover expenses especially when markets are down.
I hope Rachel-with-a-golden-pension understands that.
So many workarounds here. Money market funds? ETFs? For the well informed this becomes a nothing idea.
A stocks & shares ISA can include cash…
The Brit ISA idea, and cash ISA allowance threshold tinkering, is just (yet) another sign that the UK is no longer a serious country.
Was it ever? Perhaps. But much less so since 2016, surely.
Sadly, the rot (which is not to say the status quo ante was great either) is not confined to this jurisdiction.
Performative over performance, and form over substance, is the rule now internationally, rather than an exception.
Musk says that he’ll save $2 tn p.a. when that’s the entire non-Defense discretionary (i.e. non statutorily mandated) Federal spend (out of $6.75 tn p.a. overall).
But DOGE actually ‘saved’ (at most) only $60 bn p.a. – so less than 1% (and in doing so eroded the bond market’s confidence in US governmental competence and capability, and also ceded ground to strategic rivals, like China, by winding down USAID etc).
Trump says that he’ll end the US national debt, but, even without extending his 2017 tax cuts: from 2026 to 2035 the US will collect $67 tn in taxes but spend $89 tn, by itself taking the national debt upto $58 tn.
Meanwhile the budget now before the Congress will add another $4 tn to 6 tn cumulatively to that by 2035.
A trillion $ here. A trillion $ there. Before long, you’re looking at some serious numbers (for another no longer serious country).
Any wonder therefore that:
– For only the third time in history, in April 2025 US Treasuries sold down in correlation with US stocks.
– China has now reduced its US Treasury holdings below the level held by the UK.
– All three ratings agencies have now downgraded US debt.
– A Microsoft bond maturing in 2037 currently yields 4.10%, while a 30-year US Treasury maturing in 2035 yields 4.25%.
– Despite hiking the combined DoD’s /DoHS’ / NSA’s / CIA’s budget to a (staggering record) $1.1 tn p.a., this year the US will still spend more on interest on its national debt than upon its defense.
Perhaps our grandchildren will listen in disbelief that US and UK sovereign debt was ever considered a safe haven asset.
The US has dominated the global financial system since it began financing the allied WW1 effort in 1916, and intervened in 1917. The suspension (and ending) of the 1944 Bretton Woods system (between August 1971 and March 1973) was, perhaps, the first major act of the decline. The re-election of Trump in 2024 now feels like we are closer to the final act than to that first one.
Collectively, we’re all fiddling while the modern day Rome burns.
And, as a rather odious UK politician once said, albeit in a very different context, those that the Gods wish to destroy they first make mad.
Correction – there’s only been 3 occasions where the $ has depreciated substantially and simultaneously US stocks sold off – this year, 2002 and 1998. This year might be the first time that all three of the $, US stocks and US Treasuries fell together.
The cash ISA change proposal, or leaks, or whatever they are now… basically brings to light and exposes one of the key problems the average (non-)investor has when people are promoting riskier alternatives to cash, and it is a problem that promoters of real risk assets often refuse to acknowledge. Here, I use ‘risk’ to mean unknown/unforseen risk such as capital loss, as whether a saver even truely understands the inflation erosion risk associated with cash is irrelevant when saving in genuine cash products – in cash terms, a 4.5% fixed rate 5 year ISA does what it says and the risk that most savers are actually worried about is considered zero for good reason – the person gets what they signed up for and understands.
When people talk (usually, very comfortable, wealthy people) about risk assets such as shares, and have a vested interest in promoting/selling them, the problem is they very often do not appreciate that the reason many people are not in those assets is because they have opted to take the guaranteed inflation erosion and certainty, over the alternatives. This can be due to a number of reasons, one being that the investment industry and financial advisers in paticular are actually taking zero risk themselves and are largely unaccountable for what happens to an individuals investments unless they are engaging in blatant fraudulent/criminal activities or grossly incompetent – but yet, the cut they will take is generally fixed and paid irrespective of the performance. When your sales pitch involves the protection of caveats and disclaimers that basically say to someone you could lose all your money with this investment, and (not in the pitch, but pertinent) if it happens, I/my company will still be taking our cut right up until the end, you can see why people may prefer the certainty of cash.
It actually makes me really angry when I hear anyone, particularly politicians saying things like “we should be encouraging people to make decisions that have the greatest chance of helping them achieve their financial goals”, as it is a very slimey way of promoting the change but smoothing over the underlying inherent risk aspect (“chance”) to the individual deciding what to do with their money, again, by someone who has zero accountability in any form if the markets tank in the future, or if they go down a route that is not in their best financial interests, particularly when the fund management industry has the reputation that it has.
Investing might indeed have the greatest expected return over a long enough time period, but a particular individual often does not care about the average population return over an infinite set of time periods according to some likely scenarios simulated, or through the use of resampled historical data via some clever approach. I have said it before and I will say it again, if anyone wants me to invest more into equities than I do today, I will tell you what money I need and when, today, and you (hypothetically) can set up a (legal/valid) product that involves me giving you my money, and you can do whatever you want with it. As each time period occurs, you can pay me my capital back as per my initial specification/plan, plus what would have been the return using the top of the market cash savings rate for 1 year products, assuming they were taken out every april say, plus an additional 10% of your additional return from whatever investments you have used. You can keep the 90% gain over the safe cash interest return, but if it cannot be repaid, you go to prison for a breach of contract etc – properly held accountable. Now, this is purposely an extreme and silly example, but it makes clear the problem of cash vs investment decisions and the lack of accountability of those *who only can gain from people moving into riskier investment products* (short of career risk, but lets be honest, a chancellors timeline is not that substantial). If a 10%/90% split on gains over guaranteed cash returns is not good enough for you, what would it require 5%/95%? – ok fine, I’ll accept that. All I am adding here is some risk on *your* side, I could get that X% cash return anyway with cash savings (ISA or otherwise), so isn’t it reasonable that if you want to change my decision from a ‘safe’ cash product to a ‘capital risk’ product, that you carry the risk if I only actually want a small proportion extra over and above what would have been my safe capital+interest return?
This is the problem as I see it for the average, exclusively-in-cash saver (or non-investor) – it is not even the simple matter of expected returns and such, it is the complete imbalance of where the ‘risk’ falls. I used to be near 100% in cash for a long time and it served me well. I now look at the equity/investment risk in a different way with the simple question “If I can get 4.5+% fixed rate in cash savings eg 1, 2, 3, 4, 5 year fixed rate savings (and calculate/factor in the tax on interest outside of a cash ISA), what return in equities would I need to get (after factoring in the cut taken by the platform) before the investment risk (including up to a potential ~45% capital loss) is worth taking? Is that return likely to be achieved?”. I then invest and save accordingly. As I am still a very high percentage in cash (Ms Reeves would not approve), I have the luxury of being able to guarantee only ever selling/rebalancing my equity allocations at market highs. I may not ever know when I am buying low, but if I only ever sell from a region index at the (current) top of that index, I know I only ever bought at lower unit prices. I only have this luxury to wait because I have cash – the chances of me being a forced seller anytime soon are pretty low.
Anyone that tries to move people into risk assets needs to be honest about where the risk is falling, as almost always, the person pushing the move is actually taking on zero risk to themselves but has something to gain. The ‘risk’ typically falls 100% on the person being asked to move out of cash.
@Random Coder (#25)
While I too am happy to have plenty of cash in retirement (currently about 20% of my portfolio), I’m also happy to have about 68% in equities too since, based on history, they are likely to do better than cash over 30 or 40 years.
On your proposition I could (hypothetically) offer two ‘solutions’
1) 4.6% of your capital every year for 30 years as income and your capital returned to you at the end of 30 years.
2) 5.97% of your capital each year for 30 years with nothing returned at the end of the period
Solution 1 is as simple as buying gilt TR4Q (4.25% coupon, clean price of 83.21 means that £100 would buy 4.25*100/83.21=£5.10 coupon income per year). You would receive 0.1 of the excess over 4.5% and I would receive 0.5 of the excess. At the end the capital would be worth £120 of which I would return £100 to you and keep the rest.
Solution 2 requires the construction of a gilt ladder over a 30 year period (see https://lategenxer.streamlit.app/Gilt_Ladder) which would currently payout about 6.4%. A payment of 6% would give you about 0.1 of the excess and me 0.43 of the excess (the excess here is based on the cash paying out £5.87 over a period of 30 years, i.e., pmt(4.5%,30,-100,0,1) ).
The risk to me in both cases is that the UK defaults on its debt (a situation that would damage the banking system and cash ISAs too).
Either of those solutions could be self built in an ISA or SIPP.
Finally, we also have to remember that 5 years ago, cash rates were much lower than 4.5%.
Yeah, but the gilt ladder and rates are based on the position today, my proposition is based on the unknown actual rates that materialise in cash rates in the future until the point I am paid (which could indeed be very less than rates today). So, for example, I say I need £X0,000 in 5 years, the value returned to me under this hypothetical scheme would be £X0,000 in 5 years plus the interest that would have been returned if the rates I subsequently would have got in that period matched the five-1 year return fixed cash rate each year (where the rates are currently unknown but would be known for each year at the end of the 5 years). Using todays gilt rates would not achieve my aim of guaranteeing a return that would have been reflected in the rolling annual top 1 year fixed rate savings product (it could be better, yes, but it also could be worse, and the prison risk is where your risk would still lie if you could not match the returns I would have got if I saved everything in cash each year at top of market 1 year cash rate).
If it was that easy to guarantee to beat the future (but genuinely unknown) cash rate using gilts, and 100% safely (I assume the risk of a UK government default to be near 0%…) then no one would be in cash.
I take your point, but using gilts is basing all future gains on todays gilt rates, not what would have happened if cash was saved each year (with interest) using the best unknown cash rate at the (future) time. The easy way to see this is assume something happens that doubles gilt rates tomorrow – yeah the cash saver probably has some money locked up taking a real term loss until the next savings product is taken out, but the next product will likely be at a greater rate given the gilt rate doubling.
The rate is really a distraction from the issue – the point is with capital at risk assets, the person being asked to invest instead of save suddenly has all this risk, with the “seller” getting none of it. With cash, the only risk is inflation.
@Random Coder (#27)
You’re quite right, no-one can know in advance whether cash will beat equities or vice versa over any period. Historically, over 5 year periods UK equity returns have beaten those on UK 3-month bills (a proxy for cash) 80% of the time, for 10 year periods it was 91% of the time, 20 year periods 98% of the time, and reached 100% for 28 year periods. So that tells you the odds in play historically on your proposal assuming a matched outcome (the odds for an excess profit outcome will reduce).
On inflation risk, over that 28 years, the worst equity annualised returns were +1.2%, the worst annualised returns on 3 month bills were -2.3% (i.e., where equities were a worse bet, they were only slightly worse, whereas cash was much worse).
In my view, this unpredictability is a good reason for holding both assets and, in retirement, the predictability of income from individual bonds, bond ladders, annuities, or DB pensions worth paying the price for.
More simply put, I plan to give you £X today that I plan to save in cash for the next Y years at the top of the market fixed rate accounts, which are currently unknown rates. You (an arbitrary person, not yoh, Alan!) want me to instead invest in an asset that involves capital risk with me taking all the risk, because the expected return is greater (which I agree with, and fully understand what this means). I say no thanks, but if you can guarantee my return is minimally greater than what it would be under my cash plan that I am happy with, and I get only a small fraction of that extra gain over and above some well defined and measurable quantity (such as X + interest that I would have got under my clear cash saving plan) AND the risk is on you, then lets do it, I give you X today and we both reap the gains you are telling me about. If you can’t accept this scheme then you should understand that your proposal to change a saver to an investor is only valid while you are not prepared to take the risk that the cash saver is currently not prepared to take either. My hypothetical example simply puts almost all the gain from your proposal onto you, the seller, to force an appreciation of the risk you are trying to push on them, as really it becomes YOUR gain when they are basically only requesting what would have been the cash saving return and a tiny amount more.
Few people will accept this if the risk is on them, and the reason why is pretty clear. This is the gap that needs to be closed if anyone wants to move a saver that is happy with cash+interest returns (with inflation erosion, yes, but no capital risk), to an investor in equities taking 100% of the risk (which is the aim of the governments proposed tinkering with ISAs).
And for the record, my equity exposure has only grown over the last decade, but this is not the same as supporting the view that people in cash should invest more, as that implicitly is the same as saying you would like people to risk their capital for the greater good (be that simply be the greater expected returns for the individual, or the wider society if you believe in investing creating jobs and wealth etc, or worst case, to bankroll your next yacht funded by investment fees in your fund that you are promoting). Basically, I do not expect anyone to become exposed to huge capital risk if they are happy with saving cash and getting a fixed rate of interest. These are not the same and should not be treated as such, which is why this proposal of messing with ISAs is a problem. This is a question of no capital risk vs capital risk, and who is taking it, and who is gaining from it. Reducing cash ISA allowances looks to me as trying to push a whole load of people into much much riskier assets for a gain that is not really about the expected returns to those individual investors. I simply don’t like the aim of investing in Britain for the greater good expected to be funded by the current risk averse savers, which is what the ISA tinkering ideas are about. Indeed, if this was about maximising expected returns for UK savers, it would at least be pushing diversified investing and not pushing UK assets.
@Random Coder, @Alan S
Interesting chat guys. If I have understood @RC correctly you could be talking about what is generally known as “structured products”. IIRC, these are sometimes controversial and always far more complex than they seem! FWIW, I did indulge years ago in a small offering whereby you got back x% of the market return (where x is <100%) in exchange for an underpin of original investment back plus plus possibly a nominal bit of "interest" foregone.
The problem is that the provider always wins – as its take is mostly in "hidden" fees.
@Al Cam et al
And, as (almost) always, there are articles about how to do this yourself on Monevator:
https://monevator.com/guaranteed-equity-bond/
https://monevator.com/pimping-your-diy-geb/
@Alcam [again, all references to “you” below are to an arbitrary person trying to get someone to invest instead of save!], that is kind of my point, the risk is never borne at all by the investment fund/manager, they will win/gain regardless, and if it was such a no-brainer to beat the returns of simple cash with no real risk attached then where are all the simple products such as the type I describe which surely would make investment companies millions if these fund managers were so good?.
The more I thought about this, it is even simpler, in 5 years from now we will know what the greatest 1 year saving fixed rate cash products were occuring during each April, call these a% to e% (eg where a could be 4.5% ie 0.045). I am saying instead of my total return on savings X, 5 years in the future, being X(1+a)(1+b)…(1+e), I am saying I will take any value greater than this that you can offer me today, you can take the rest, but all the risk is on you, and if you don’t achieve this, you are accountable in a serious manner i.e. prison was my extreme hypothetical to make the point, but maybe just your career in finance is over?.
Does no one see the irony of trying to push people into risk bearing investments, but only when the provider of it is absolutely completely immune from all accountability, and profits regardless via fees, even when the trivial aim of achieving only a penny more than the cash equivalent that would be achieved via saving is desired, and the person pushing the investing even has total control and choice over how that £X is invested? This is why many people are in cash, not because of lack of understanding about investing and expected returns.
If the government wants more tax by cutting cash ISAs then fine, just say it and do it – people with substantial sums in cash ISAs are not stupid, they know this is the government trying to get those with actual real money/cash to shoulder all the desired risk to invest in the UK.
It is easy to advise people what to do with their money when there is no real consequence on you if it goes wrong. Until this changes, I will be overweight in cash. In the event I am forced to fiddle with ISAs to meet some UK percentage, I will sell UK index funds simultaneously from elsewhere to maintain my proportions, or maybe even reduce it. The entire plan is a waste of time and may even backfire if it encourages people to consider pension investments and move from default funds into funds with an even lower UK allocation.
As someone who quit employment a couple of years ago I do have a fair few years expenses in cash, which I would’nt want to be without. However, I don’t think I’d be interested in the kind of opaque ‘guaranteed’ high fee product that we’re talking about here. The reason I read Monevator is to educate myself to be able to make better financial choices. Surely transparency and low fees are more important? And what about all those years where holding cash was a losing proposition in real terms?
Yes, but the point is not about this imaginary products high fees as proposed above as a starting point for discussion (as the current saver would still profit over his/her planned current approach), it is who bears the risk of investing today, which exposes why such products do not exist. The example holds even if I say you can do what you want with my money as long as I get back what I would have got i.e. no gain, over what the cash return would have been had I followed my original plan, surely a star fund manager would sign up to that (but with career ending risk to them if they don’t deliver)?… If this product ever became reality and fund managers made profit from it, natural competition would kick in and suddenly the investor return would have to go up when the next/better fund manager wants in on the action/profits from such a product ie effectively lowering the “fees”. Then everyone benefits as everyone is making more money than they would have with their original plan, and everyone is more invested? Again, if it was that easy it would already happening.
You are correct about transparancy and low fees and most of my equities are in low cost index funds split by geographical region. This is all extreme hypotheticals to discuss where the risk lies as soon as someone who is risk averse is encouraged to move from straight simple cash into investments where capital is at risk.
The real term cash loss is exactly that, an accepted (and likely) loss. The issue is not about saving in cash leading to a real term inflation adjusted loss – something that is understood by most people I would imagine who have funds to invest if they wished. Cash savings and the returns, and even the inflation loss, is all very clear. The issue I am talking about is that of who bears the risk and who is guaranteed to gain regardless of returns when a move from cash is desired and promoted, as seems to be the case based on current ISA discussions. It seems the government wants people who are content with cash returns/interest to move into capital at risk investments, and mostly UK ones at that, for the greater good of the country.
No. I don’t think so.
@RC:
What on earth makes you think anybody wants to offer a product that they bear the total risk on when it is just so much easier to pass, at least, the majority of the risk to the punters. This is how financial services work – they are not there to be fair, equitable, or cuddly – but to make a profit at
the punters expense!
So, in essence you pays your money, you takes your choice.
HMG pushing folks in any direction is a sure fire reason to not go there. Either HMG are really stupid (which surely cannot really be the case, although all the signs indicate they might be) or are just totally desperate.
@Ben Ber:
Thanks for the links. IIRC back in the day the range also included leveraged opportunities too.
I guess I fell for the marketing spin – but I think it turned out OK; it was a long time ago. And, much more importantly, I learnt I could have done better – which was a rather useful lesson and worth the gains foregone.
Reports now that Reeves won’t be cutting the ISA allowance (BBC radio and Telegraph paywall).
@Al Cam
Ok, yes, we are agreed, this is my very point but I was trying to not be as blunt to the reality. I too thought this whole thing was a joke if they thought people with large sums in cash isa’s would simply move even a small portion to risk based investments – most are not dumb. The whole “encourage people to have the best chance of reaching their financial goals” and such is a nonsense, and people who are in cash, and can happily stay in cash will not be falling for it and lining up to invest in UK assets.
As implied earlier, easy gig that financial advising, encourage folk to take risks with their own money, collect fees along the way, doesn’t matter what happens really, the advisor is clean as long as the appropriate caveats are delivered and acknowledged. Job done.
I did a bit of digging through my records. I found out some more about two structured products I had in the dim & distant. One dates from nearly twenty years ago and the other is even older. One was market based; one was employer share option like. I got the gist about correct above, albeit some of the finer details were missing/mixed up. Both ran for 5 years and neither lost any of the initial deposit. In summary: one did rather well, the other not so good. FWIW, the leveraged one (at a gearing of 10:1) did better. I am sure you can guess which one is the eldest?
If Reeves wants to actually make retail take more risk with their money then the real problem is savings rates are too high. With the BoE rate at 4.25% (and in a cutting cycle), it should be impossible to get that rate on even a short term deposit without taking signficant credit risk. The Jan 2026 Gilt yields 3.30% as an example. The Oct26, 3.65%.
The fact that retail investors can actually get more than that without taking credit risk shows how much they are being subsidized via FSCS protection. Academic evidence generally suggest bank deposit insurance schemes should either be precisely zero or very large. Anything in-between tends to create cliff-edge inefficiencies. The UK FSCS protection set at £85k is an example of that. Essentially, small retail savers are being subsidized by larger savers and businesses for whom the £85k limit too small.
Coming up with British ISAs and trying to force people into equities is a terrible idea. My view has always been get rid of FSCS protection. Expose people to the actual credit risk of unsecured lending to a bank. A small tail risk of 100% capital loss. If you want risk free, you still have Gilts and NSI (but watch those rates collapse). It’s retail savers who are exploiting the system. Give them a much lower risk free rate or force them to take credit risk and perhaps some will decide other assets are then worth the risk.
@ZX: Agreed. Distortions abound.
But if everyone brought equities then they’d exhibit lower real returns.
Over daily to annual timescales bonds show lower volatility than equities. But over rolling 20 year periods the opposite.
I want inefficiencies and behavioural arbitrage, because that’s where the mispricing opportunity lies.
Same with ESG. Just means competing buyers shun good investments. Doesn’t matter why they shun it provided only that it’s an artificial barrier unrelated to the company and sector fundamentals.
@ZX (#40):
Interesting perspective. I see where you are coming from – but would give your idea of no deposit protection a tad more than 0% probability of coming true – IMO we are just too needy/pampered/entitled these days. IIRC, there has been more talk recently of increasing the current FSCS limit – but not in any way towards your alternative suggestion of very large!
OOI wrt to risk, one of the two structured products I mentioned above matured about a year before the GFC; the other was after. That probably says more about their respective performance than any other factor!
@ZX – all very interesting and informative for us but I think your post doesn’t address the elephant(s) in the room.
The average member of the UK population doesn’t have an investor mindset. They don’t want to take any level of credit risk and they’ll take the best interest on their savings they can without questioning how the number was arrived at. They certainly aren’t making comparison’s between cash and bond yields or equities.
If the government is looking to increase investment into the UK they really ought to be looking at ways to make the UK better places to start and grow companies which will in turn attract institutional investment. All the talk around retail investment is wasting time and energy messing around at the edges.
It also ignores the fact that a lot of the “protections” which includes deposit insurance for relatively small value private savers etc probably would not be required or even exist today if the people working in the industry were not so incompetent historically, leading to a complete meltdown, requiring the need for the industry to be saved by the state.
If banks/financial companies want to attract deposits to fund whatever, from large numbers of private savers each with relatively small sums (but possibly significant to those individuals), the conditions need to be right for that, and no one wants to see physical cash under matresses. Sadly physical cash becomes a valid consideration if the value is small enough, the rate of interest is near zero, and the only consideration being balanced is the risk of losing it all due to a robbery or house fire that defeats a fire safe, or the failure of a bank and subsequent 100% loss due to institutional/staff incompetence, or otherwise. Those protections exist for a number of reasons, some of which relate to needing to promote enough trust in organisations so that handing over the money is an acceptable risk over the alternatives. The industry needs to take some responsibility for the protections that are now in place. This is another case of wanting the gains (in this case, the deposits) but none of the risk.
@Alan S #16 There are a bunch of interesting ISA stats at the link below.
– The highest proportion of savers, around 46.2%, saved between £1 and £2,499 [in an ISA]
– The median ISA holder (by income) had annual income of between £20,000 and £29,999, the average ISA market value of this income group was £31,014
– 16.9% of the total subscribers saved at the maximum [£20k]
– Stocks and shares ISA holdings account for 59.3% of the market value of ISA funds [i.e. larger than cash ISAs]
https://www.gov.uk/government/statistics/annual-savings-statistics-2024/commentary-for-annual-savings-statistics-september-2024