Have you got a cash ISA? Chances are, you do, as the latest HMRC data shows women represented half of all Cash ISA holders last year, at 55% (3.59m) of the total (6.47m). In fact, for each of the last five years, women have always represented more than half of all Cash ISA holders. Women aged 25 to 34 are the most likely to hold Cash ISAs of all age groups, at 23% (811,000).
The thing is, cash ISAs may not, after all, be the best investments for our money. Bowmore Financial Planning (part of Bowmore Wealth Group) says cash has historically underperformed over the medium and long term and this could continue. Interest rates in the UK will also likely remain at their record lows for years due to the economic recession we find ourselves in.
To put this in some financial context for you, cash has shown itself to be a less reliable investment since 1925 (!) lagging behind global bonds (6.6%), rental property (7.2%), gold (7.7%) and UK equities (12.4%). If none of that makes sense to you- don’t worry. The important takeaway is that cash is the least profitable on that list- and with tons of us investing in it- we’re not really getting much money back at all.
Fun, huh? So we asked the experts – what’s going on, and how can we fix it?
Why are cash ISAs not a good idea?
Research from Janus Henderson Investment Trusts shows that we have all been saving far more during lockdown. In the first six months of 2020, UK households stashed away £77bn, far more than the previous record set for a full year (£82bn in 2016). An eye-watering £1.5 trillion of cash is now tucked away in savings accounts.
But the interest rates are so low on these investments that it is almost not worth it. Janus Henderson found that UK households are only earning tiny amounts of interest on these savings – just £5.7bn over the whole of 2020. This is just a bit more than the record low of £4.6bn in 2017. The same research shows that personal finance experts recommend that families set aside in cash at least three months of income. When we have been saving over 4 times this amount – this means banks have the use of almost £1.2 trillion in spare cash that their customers could be investing elsewhere – with way better returns!
James de Sausmarez, Director and Head of Investment Trusts at Janus Henderson says: “UK savers are squandering the opportunity to earn tens of billions of pounds extra in income on their savings. Interest rates are set to stay very, very low for a very long time, so there is no light at the end of the tunnel for cash.”
This missed-opportunity is what James calls “muppet money”-
“What’s more, this cash is not evenly spread around, but instead is concentrated in the hands of wealthier households. That suggests there is even more than £1 trillion in cash that isn’t needed to meet contingencies and is therefore available to invest much more productively. Banks call this ‘muppet money’ because they know savers are missing out on much better opportunities elsewhere.”
So why do women overwhelmingly opt for CASH ISAs in particular?
It’s all down to the FinCap Gap (that’s the financial capability gap), says Jill Ellicott, Chartered Financial Planner at Bowmore Financial Planning.
“In many cases, women overwhelmingly opt for cash ISAs due to a lack of knowledge, confidence and experience of investments,” she says, “Unfortunately, the basics of investing is not something that has been taught in schools. There’s a plethora of options out there and sometimes, unless you really know what you’re doing, it may feel safest to keep your money in cash ISAs. Academic research suggests that men tend to be overconfident in their investment skills and women less so.”
So, because we assume we know less- or in some cases are actually less knowledgeable and therefore more risk averse- we invest in ways that seem less dangerous.
“This financial-capability gap has partly been born through a lack of education and confidence amongst women about what they know. A lack of confidence can lead to women deciding to stick with “safe” options such as Cash ISAs, rather than reaching out to ask for advice, even though this can be detrimental long term,” explains Jill, “A YouGov survey found that the majority of men (72%) say they have (or at least claim they have) a very good understanding of financial products and investments. Meanwhile a much smaller proportion of women (58%) say the same thing.”
“For many women, finance is often so tied up with the “here and now” and juggling family life with work and the various financial pressures of day to day that it’s quite hard to look forward for a 10 or 15 year horizon, which is often the timescale required for real asset-based investment,” says Jill.
What needs to change?
“I think investing an hour with a financial planner or adviser would really help to improve confidence amongst women, yet there is evidence to suggest that not that many women have one,” says Jill, “A professional planner can also be helpful in helping people to work out their goals and then stick to them – seeing the progress in action can be very useful in breaking bad savings habits.”
There needs to be more robust financial education – especially for women.
“New educational initiatives to improve understanding of financial products and investing at an early stage; in schools and universities would be so useful,” Jill says, “In turn, this should help improve confidence amongst women, and then we need schemes to raise awareness about why certain investment options (such as Cash ISAs) can be detrimental over the long term.”
Yet, Jill observes, only part of this is down to women’s lack of confidence or lack of financial advisor. A lot is due to predetermined biases in the financial advice sector.
“The stereotypes surrounding women’s financial literacy can, unfortunately, feed through to the realm of financial advice and stop women from accessing the same investment options as men,” she says, “ It’s regularly suggested that financial advisers who are men tend to suggest very low risk/low return investment products to women as they assume that is what they are looking for.”
“This self-reinforcing cycle needs to be broken,” she notes, “The financial services regulator, the FCA, already regularly pushes awareness schemes; such as a recent one on pension transfers, so there is no reason why there could not be some more schemes aimed at women. We should also encourage more women to become financial planners which would help reduce the chance of preconceived biases affecting recommendations to women!”
So, if not a cash ISA, what should we be investing in?
“For every one of the last thirteen years, shares have provided a better income than cash,” says James de Sausmarez at Janus Henderson, “Over the long term, investing in shares has not only provided a healthy income, but also the scope for capital gains too, protecting savings from the ravages of inflation.”
Jill agrees, saying that- while cash ISAs have a place (always good to have money somewhere less risky) it is best to look at longer term funds. She recommends investing in Equities (stocks and shares), Bonds (loans to the government and companies) Alternatives (for example, this might include commercial property and infrastructure investments). If this sounds complicated, don’t fret. They can all be consolidated in something called a “stocks and shares ISA” which offer the same tax benefits
as a cash ISA.
Time to get that money out from under the sofa then.