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‘Save, save, save’ or ‘Invest, invest, invest’ this ISA season?

Given the damage inflation can wreak on their financial health, you might think people would do all they can to fight against it and yet the ISA statistics from recent years would suggest otherwise

27/03/2018

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

Next month marks the third anniversary of the death of Viv Nicholson, who famously pledged to “Spend, spend, spend” after scooping a £152,319 football pools jackpot in 1961.

Nicholson, who at the time was earning £7 a week working in a cake factory – her miner husband a similar amount – proved true to her word.

Within three years, all the money was gone. 

Here on The Value Perspective, it is not our place to make judgements about what anyone chooses to do with their money.

At the time of year known as ‘ISA season’, however, when the approaching tax-year end tends to focus people’s minds on the tax-free attractions of the individual savings account, it is instructive to think about what £152,000 would be equivalent to today – £3.5m.

Now, back in 1961, most people would have easily expected £3.5m would see them through from the age of 25, as Nicholson was at the time of her win, to 79, as she was when she died – after all, hasn’t everyone had an elderly relative regale them with the details of the sort of night out a shilling would have bought when they were younger?

In contrast, few people today would be quite so confident of £152,000 seeing them through the next 50-odd years.

If, like Nicholson, you are comfortable blowing a fortune in the space of three years, there is not much point reading any further.

If, however, you are looking to make the money you do have last as long as possible, then your biggest enemy is always going to be inflation.

Inflation, the enemy of savings

In articles such as What Alan Shearer has to teach us about inflation, we have discussed how, over the years, inflation will steadily and stealthily erode the spending power of your cash.

Mind you, even if you have not read any of these pieces, the point lies at the heart of all those ‘cinema, fish-and-chip supper and the bus home for a shilling’ stories.

Given the damage inflation can wreak on savings, then, you might think people would do all they can to fight against it. Data going back to 1964 shows the average real return on stocks – that is, once the erosive effects of inflation are taken into consideration – is about 7% a year, compared with roughly 2% a year on cash. 

At the time, the latest HM Revenue & Customs data – for the 2015/16 tax year – showed four times as many people subscribed to cash ISAs as to stocks and shares ones. And while the data for the following tax year went on to show total subscriptions into cash ISAs dropping by £18bn, that still meant around two-thirds of the £62bn subscribed into ISAs in 2016/17 went into cash.

Why save long-term in cash? 

Of course, people might be in cash because they think they might want immediate access to their money but, there is one group of ISA investors for whom this is simply not an issue.

This is anyone who invests in a Junior ISA, which is the government’s way of encouraging people to save on behalf of children.

Any fortunate beneficiary of a Junior ISA is unable to redeem their investments until they reach 18 and so, by both definition and regulation, a significant percentage of money flowing into Junior ISAs must adopt the sort of long-term time horizon that suits stockmarket investment so well.

And yet, according to the latest HM Revenue & Customs data, three fifths (61%) of the £858m subscribed to Junior ISAs in 2016/17 was in cash.

Regardless of your views on ‘Spend, spend, spend’, surely Junior ISAs are a time to ‘Invest, invest, invest’?

Author

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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