Why arent more people saving and investing via Isas? And what can be done to encourage more people to use them to prepare for their financial futures?
As we near the end of this years Isa season, we can reflect that it has never been easier for people to invest – and it can be really tax effective.
Yet amid the riot of advertisements and features, we should recognise that many people still do not save via cash Isas, let alone investment Isas. ONS figures show that in the last tax year some 11.1m adults opened an Isa – not bad, but less than one quarter of the UK adult population.
Part of this may be due to the fact that the word “saving” has two distinct meanings.
When your supermarket receipt tells you how much you saved in your weekly shop, it means you saved it only in the sense that you didnt spend it. It is the benefit of savvy shopping.
Research undertaken for Barclays shows that we spent more than 3,580 hours of our lifetime hunting for bargains, and are on average around £25,000 better off for doing so. Clearly savvy shopping pays.
That is all fine. But saving also means setting aside that money for your future needs, and we dont seem to be doing that very well at all. The same Barclays research shows that 93 per cent of respondents claim to know the advantages of investing, but only 10 per cent put their money to work through investments.
It helps if you consider banking as some behavioural scientists do, not necessarily in terms of money, but also in terms of happiness.
Modern banking can help you manage your lifestyle and happiness across different stages of your life. You can borrow your potential future income to buy the house or the car you need now; you can invest some of your current income so you can have a comfortable retirement.
Looking at it this way, Isa season should be presented in terms of investing for happiness rather than money. A little gratification deferred now means more happiness in the future.
Behavioural scientists speak of present bias – saving is tough because we all prefer happiness now. But that isnt the only bias that affects investors at this time. Even if you are investing in stocks and shares Isas, there may still be biases to your behaviour that you can amend.
There is familiarity bias. It leads us to invest in well-known companies – household names we might know as a customer as well as an investor. Its a dangerous bias for new investors who could end up owning shares in a single company rather than diversifying.
Then there is home bias, encouraging people to consider investing in companies or products that appear close to home. Here in the UK, that might mean buying a FTSE 100 tracker rather than looking beyond our shores.
Luckily, this isnt so dangerous since many UK blue-chip companies are international and may not conduct much trade at all in the UK. But it does mean that investors minds may not be open to the opportunities a more global approach may bring.
Of course, investments can fall in value no matter what strategy you adopt, but Isa providers can help overcome these biases by offering diversified ready-made investments and easy access to funds for investors.
We should be encouraged to view Isas as a means to future happiness. By strongly visualising the end goal we want to achieve – say, going on that retirement cruise or sending a child through education – we are far more likely to overcome those biases to reduce risk and enjoy long-term benefits for the future.
Read more: Healthy habits of Isa millionaires