Make it better for us to try saving more

Earlier this year during the World Cup, a large advertising hoarding graced the station where I arrive in London every weekday. It was for a betting company, exhorting punters to have a flutter on the footie.

On a different part of the station concourse was another billboard, promoting an investment product. “Speak to your financial adviser”, it said. It included prominent warnings: Your capital is at risk, you might get back less than you put in, past performance is not a guide to the future.

The commuters of southeast Essex might logically conclude that gambling is a perfectly reasonable thing to do — but that investing is complicated, risky and likely to lead to you losing your shirt.

Changing the perception of risk (or relative risk) among consumers is a key recommendation in a thought-provoking new paper by the Social Market Foundation, a think tank.

The backdrop is a familiar one. Among advanced economies, only Greeks save as little as Britons. We are living longer, yet the twin pillars that once supported retirement saving — the employer and the state — are weaker than they were.

What savings we do have tend to be in cash, a terrible long-term asset. A large and worrying gap is opening up.

Katie Evans and Emran Mian, authors of the report, suggest savers might become investors if promotional material focused on long-run annualised returns, rather than year-to-year ones, which tend to highlight the volatility of markets. Presented this way, investing is a no-brainer: equities with dividends reinvested have returned about 5 per cent a year for the past century (after inflation but before costs), vastly outstripping the returns from cash.

What else? They advocate removing stamp duty on shares for retail investors and creating a £2,000 Isa (individual savings account) allowance for bond investment. I can see the rationale for both, but doubt either would make much difference.

Most savers do not use up their current annual Isa allowance, and I don’t think stamp duty puts many people off investing.

The report suggests that financial education continues through key stages of adult life, in classic “nudge” fashion. Getting a national insurance number, applying for a student loan or securing a first job should be triggers for conversations about money. This seems a sensible, low-cost proposal.

More controversial is the idea that there should be a window to access pension savings at age 35. The rationale is that this is the age when income pressure is at its most acute and people are mostly likely to stop contributing to a pension. Allowing limited access would get around the perception — widespread among younger people — that pensions are a “black box” where your money is locked away for decades.

The counterargument is obvious. Pensions should be for income in retirement, not for a new car or a kitchen extension, and tax relief on the way in should be balanced by tax on the way out, a principle that recent reforms have already eroded.

Nevertheless, it’s an interesting idea in an era when the distinction between “work” and “retirement” is blurring.

There are two issues I think the report could have looked at in greater detail. One is the behaviour of companies. UK companies have very high cash balances, they can borrow cheaply and pay one of the lowest corporate tax rates in the OECD (if they pay tax at all).

Yet the state subsidises low-wage jobs through in-work benefits like tax credits. This is daft. Put bluntly, many people need to earn more before they will invest — and many companies could afford to pay them more.

The other is housing, which hardly got a mention. Forget cash, shares or bonds: property is Britons’ preferred savings vehicle. Again, this is rational. Housing is tangible and easy to understand.

You can live in it while it appreciates, saving rental costs. No bonus-hungry executive will mess it up. Mortgage debt has never been cheaper.

House prices have performed fantastically in many parts of the country and the government seems determined to keep it that way.

Of course, houses can be tricky to sell, their prices may fall, or rise by less than inflation, or they may generate only small real returns once the cost of finance over long periods is included. But you won’t catch many people talking about that.

— Financial Times