Are we holding too much in cash?

By Rhydian Lewis

Not only do we need to save more but we should make our money work harder. That’s the conclusion of today’s report from the Social Market Foundation (SMF) – “Saving Better”– which RateSetter is delighted to support.

We launched RateSetter to improve financial inclusion by giving more people more opportunities to put their money to work. There are lots of people who are happy to accept some risk in exchange for potentially better returns. By connecting them directly with risk-assessed borrowers we are opening access to an asset class which exists at a point on the risk-return spectrum that was not previously available, and sits between the certainty of cash and the more volatile nature of stocks and shares.

The SMF report looks at the current tendency amongst UK savers to hold cash. This is implicitly encouraged by the saving and investment framework itself – for example, merging the allowances for cash ISAs and stocks and shares ISAs has increased the proportion of funds held as cash in ISAs.

The report notes that savers are holding more than £200 billion in cash above and beyond what they require for a 'rainy day' – defined as three months’ worth of income. This money has actually lost value thanks to being eroded by inflation, but if it had been invested, it would be a much different story – for example, hypothetically, it would have grown by £40 billion if it was all invested in peer to peer loans.

To respond to this challenge, we need to start an open and honest conversation about risk. Platforms that offer investments are required to make clear that there is risk attached to investing. I fully support this – it is eminently sensible – and our website sets out very prominently that investing via RateSetter carries risk. Interestingly, while cash deposited in saving accounts is generally considered to be safe, depositors are in reality exposed to risk in another way: the risk of low returns, insufficient to even preserve the real terms capital value. But there is currently no requirement for savers to be informed of this risk. In my view, this is something that would benefit from further consideration.

The SMF has highlighted a great opportunity to unlock the economic power of Britain’s savers by promoting diversification of investment – an opportunity to add tens of billions of pounds to the wallets and purses of people across the UK. Rather than nudging people away from this opportunity, the UK’s saving and investment framework should be empowering them to access it, if they choose to do so.

Over the past decade there has been a revolution in UK financial services. This has challenged what had come to be accepted as the norm. New banks have forced established players to up their game. It’s become faster and cheaper to move money around, and across borders. And online marketplaces like RateSetter have provided people with a greater range of accessible investment options. We now need to help people capitalise on these innovations and enjoy the value that they can bring.