New research released today from Royal London, the UK’s largest mutual life, pensions and investment provider, shows that more than half (60%) of Cash ISA (Individual Savings Account) holders in the UK could be persuaded to move some of their funds and invest in a Stocks and Shares ISA.
Two thirds of adults in the UK have an ISA, but more than 25 years since they were launched, there’s still widespread confusion about how they work and how they can save tax. Royal London’s new report, The ISA landscape, includes insights into what people know about how ISAs work and what people see as the barriers to moving funds from Cash ISAs to Stocks and Shares ISAs.
What’s holding us back from using Stocks and Shares ISAs more?
According to Royal London’s research, those who aren’t currently investing in a Stocks and Shares ISA state that financial constraints are the main barrier to them making the decision to invest, with more than two fifths (42%) stating that not having enough money was stopping them from investing. Financial constraints more commonly affect women, with 45% citing lack of sufficient money to invest (compared to 38% of men).
The second largest barrier to people putting their money into investments was their concern about the risk they were taking with their funds. Over a third (35%) of people who don’t currently invest had concerns about potential financial losses from putting their savings into investments and 12% worried about accessing their money if they needed it.
Potential for better returns would be the main driver for those with a Cash ISA to move some of their money over to a Stocks and Shares ISA (39%), with this rising to half (50%) of those aged 18-34. The ability to make returns above inflation (27%) is another key driver, and with 60% of people stating they could potentially be persuaded to move their funds to a Stocks and Shares ISA, that could potentially see up to £216 billion of current Cash ISA funds invested1, if people felt confident to make the move.
The ISA knowledge and confidence gap
People also said that knowledge and confidence gaps were holding them back from investing, as a quarter (25%) of those without investments admitted they do not understand stocks and shares, whilst 16% report uncertainty about where to invest.
A lack of knowledge and confidence was more notable among younger age groups, with almost a third (31%) of 18-34s and 35-49s (30%) admitting they do not understand stocks and shares, compared to just 17% of those 70+. Similarly, feelings of uncertainty were aligned by age groups, as 28% of 18-34s are unsure where to invest, versus just 5% of the 70+ group.
Surprisingly, knowledge of Stocks and Shares ISAs isn’t much higher among those who actually hold this type of account: more than half (58%) of Stocks and Shares investors said they only had ‘a little knowledge’ and just under one in ten (9%) said they either had no knowledge or were unsure about their understanding of how their ISA works.
Younger (18-34) Stocks and Shares ISA holders are more likely to say they have a lot of knowledge (42%) compared to other generations (34% of 35-49, 24% of 50+). While men are more likely to state that they have a lot of knowledge (36%) compared to women (25%).
However, when we asked questions that tested people’s understanding of key ISA tax rules, there is a lot of confusion. Two-thirds of UK adults (66%) either incorrectly believe they pay tax on gains from Stocks and Shares ISAs (25%) or admit they don’t know (41%). Worryingly, more than a third (37%) of 18-34-year-olds think you pay tax on gains from a Stocks and Shares ISA, much higher than other age groups (26% of 35-49s, 18% of 50-69s and 16% of 70+).
Commenting on The ISA landscape report findings, Sarah Pennells, consumer finance specialist at Royal London said:
“Cash is king for short-term savings, but for those who are comfortable with the risks of investing and can leave their money invested for at least five years, a Stocks and Shares ISA may be worth considering. The most common reason people say they don’t currently invest is because they don’t have enough money, but one in four say that not understanding stocks and shares is a barrier to investing, while almost one in six say they’re unsure of where to invest.
“Investing isn’t right for everyone, but some Cash ISA savers could be missing out on the potential for higher returns, especially over the longer term.
“Our in-depth research gives us the opportunity to examine the behaviour of ISA savers and investors and their knowledge and understanding of investing. It’s concerning that, over 25 years since ISAs were launched, the main tax benefits of investing through a Stocks and Shares ISA are misunderstood, with two thirds of adults either thinking they pay tax on gains from a Stocks and Shares ISA or being unclear. There’s a significant opportunity to help consumers understand the tax benefits of ISAs and what’s involved in investing, so people can make a more informed decision about what’s right for them and their financial goals.”
