Why are Brits hoarding cash?
Like Tolkein’s Gollum, Brits like to hoard their assets, opting for the security of cash over equity based investments.
Barclays estimates that £430bn in investable funds—cash exceeding six months’ salary—are held in bank accounts rather than funnelled into the stock market.
This begs the question: why are British investors so devoted to an asset which consistently delivers returns below inflation?
Why are Brits hoarding cash?
Since the era of low interest rates ended, cash has gained in popularity.
In the last year, brokers have been fighting for market share not by offering lower commission or enhanced services but by offering market-beating interest rates on uninvested cash.
Rates over four per cent are readily available on cash ISAs, creating a psychological barrier for potential equity investors.
Without confidence that stock market returns will surpass these rates, many may hesitate to make the leap into equities.
Consumer journalist Paul Lewis addressed this in 2016 with his ‘active cash’ analysis, producing evidence disproving the idea that there is a risk premium to be gained from stock market investments.
His research suggested that the contrary is true and that cash often outperforms equities – a provocative claim, but one that is based on flawed methodology in today’s market. His starting point is that you have to select the best cash return every year.
While we cannot predict the index’s performance in advance, we do know both the management charge and the platform fee.
To be even-handed, he should have reviewed this every year and chosen the cheapest. He failed to account for modern investors’ ability to avoid trading costs and platform fees while benefiting from the minimal management charges of tracker ETFs—advantages that would provide a 0.61 per cent boost to investment returns.
More important, though, is his choice of the FTSE 100 as an appropriate analogue for equity investment.
Proper diversification across small caps and global markets is essential for long term growth. The UK market has historically underperformed other regions, making it a suboptimal benchmark. Abraham Okusanya effectively demonstrates this with data here.
Cash addiction
The average return on the MSCI World Index over the last 26 years is 7.58 per cent, comfortably outpacing cash returns.
Yet in 2023, according to Aberdeen, Britain had the lowest percentage of personal wealth held in equities of any G7 country.
So why are more investors in the UK opting out?
The answer is twofold.
The tax treatment of money held in a Cash ISA is very generous, and there is a pervasive lack of understanding regarding investment risks and available products.
When tax-exempt special savings accounts (TESSAs) were introduced alongside personal equity plans (PEPs) in 1990, they came with strict rules about capital rollover and required a five-year commitment to qualify for tax relief.
Somehow, these requirements have fallen by the wayside, making Cash ISAs virtually indistinguishable from standard savings accounts from a risk perspective.
Government data from 2024 shows that almost £300bn is held in Cash ISAs, with investment platform AJ Bell estimating that £100bn of these savings, roughly half the entire NHS budget, are held in cash as a deliberate choice.
Beyond the attraction of Cash ISAs, the fundamental failing of the UK system is the absence of responsibility for financial education.
Financial literacy remains the burden of individuals, resulting in a woeful lack of knowledge about alternatives to cash. While cash is intuitively understood, equity investment is presented as a dark art requiring specialised knowledge of loss potential and risk analysis.
Risk appetite remains
This perception is reinforced by the FCA, whose mandate to protect consumers has created a lopsided focus on the risks of investing without adequately addressing potential awards.
Product distributors – investment platforms and brokers – have to caveat every pronouncement with cautionary risk warnings about the potential for capital loss, operating under the shadow of regulatory censure should they step over an opaque line of compliance.
Take, for example, Key Investor Information documents, ostensibly designed to provide accessible guidance on a fund’s essential features.
A broadly diversified ETF like the iShares Core FTSE 100, which offers exposure across blue-chip stocks, receives a solid risk score of six out of seven.
Without the relevant tools to understand the score, potential investors may conclude that equity investment is imprudently risky. Alternatively, this rating system may diminish the perceived danger of truly high-risk investments, creating a ceiling effect where nothing appears riskier than a seven.
Outside the regulated risk environment, there exists a genuine appetite for investment understanding. For better or worse, cryptocurrencies are not encumbered by risk assessments and esoteric grading systems.
Cryptocurrencies unencumbered by risk assessments
According to statistics from the Investment Association (Investment Management in the UK 2023-2024), nearly a quarter of investors under 35 hold cryptocurrency. The regulatory fixation on risk actively impedes investment in the traditional financial system; the demand will be bet somehow.
Empowering consumers to make an informed investment choice ought to be a key part of the national investment strategy.
The UK must prioritise accessible financial education, demystify investment risks and reframe the narrative around long-term wealth – building, balancing potential rewards with acknowledged risks.
Without systemic change, the “cash is king” mentality will continue to stifle financial growth, leaving savers poorer in real terms.
The challenge lies not in convincing Britons to abandon cash savings, but in encouraging a balanced approach that combines security with growth potential – helping people loosen their grip on cash and discover the transformative power of diversified investing.