The Social Market Foundation (SMF), a leading think tank, has warned that due to low interest rates and higher rates of inflation people are losing out on considerable gains by keeping their cash in accounts.
Titled “Saving Better”, the report details that risk-averse savers trying to keep their money safe in saving accounts are actually devaluing their money.
£90bn is the collective amount the population has lost out on when making this supposedly ‘safe’ decision.
Supported by peer-to-peer lender RateSetter, the report suggests several steps to address the issue of people not investing their cash in favour of saving, calling upon the policy framework for saving and investing to be fully examined by the government.
The report suggests that people could be better off investing in the stock market or peer-to-peer lenders, indicating investment into non-cash assets should increase.
Recently, the ISA allowance was raised, which the report says “may incentivise poor saving behaviour.” Another report recommendation was that this money should be put towards a scheme entitled “Fund at Fifteen” to encourage 15-year-olds to invest.
Giving each 15-year-old £1,500, they would be required to invest at least 50% of the money into a selection of asset classes.
The thinking behind this exercise is to ensure young adults get experience in real-life investment situations without significant risk, allowing them to make decisions for themselves and develop smart investment skills.
Instead of continuing to push for people to save their money in low-risk-low-rate accounts, it also asserts that the government should take “radical action to end the cash bias and create an asset owning democracy where all households have a stake in the economy and gain from the UK’s economic growth”.
In May, inflation rose to the highest rate since 2013 at 2.9%, whereas, the report noted, the rates people were offered with easy-access savings accounts remained low at 1.25%.
Commenting, Rydian Lewis, RateSetter CEO and founder said, “It is clear that an alarming number of people are not saving at all, but in addition, even those that are diligently putting money away are being short changed by holding their money in close-to-zero return cash accounts.”
This report comes after news that consumer spending has suffered the longest decline in four years, raising hopes that interest rates will largely remain low and unchanged.
The full report can be read on the SMF website.