Low interest rates have prompted a larger number of people to move their money into investments rather than cash savings accounts, new research from Aegon has shown, but these encouraging signs are clouded by fears over investors’ unrealistic expectations of returns.
One in ten of people surveyed (10%) have put all their extra savings into investments, increasing to 15% among those aged between 18- 34. A further 44% of UK adults surveyed put ‘some’ of their cash into investments.
However, Aegon said 45% have opted to keep their money in cash savings, despite the FCA recommending that many adults with investable assets of £10,000 or more in cash could benefit from investing their money.
The research also looked at people’s attitudes towards an investment that promises high returns, with the majority of people only becoming sceptical of scams when an investment promises a return of over 10%.
When faced with a promise of high returns, three fifths (59%) said they would research the investment further before investing and 35% said they would avoid these types of investments altogether in case of scams.
Steven Cameron, pensions director at Aegon, said: “While it has been mooted that the Bank of England could look to increase the base rate to dampen the effects of rising inflation, interest rates on cash savings remain at historic lows. This has promoted many people to review what they hold in cash and turn to investment opportunities with the potential of higher returns. Over time, money left in cash accounts is at risk because of the eroding effect of inflation that reduces purchasing power. Money in investments can benefit from growth which can outstrip the rising prices of goods and services, although this is by no means guaranteed.
“Despite the rising popularity of investing, there is a proportion of adults who, despite interest rates just scraping above zero, are saving large amounts of excess money in cash. While this might be used to build up a ‘rainy day fund’ or pay off debts, people with large amounts of savings which don’t need to be accessed in the short-term could have a more realistic chance of earning a real rate of return through investments.
Cameron added: “The research shows the under 35s are the most likely to put all of their extra savings in investments. This could prove beneficial over the long-term as cash invested at a younger age has the longest period to benefit from compound investment growth. But, throughout the pandemic we’ve seen younger investors getting involved in higher risk investments, so it is important there is an understanding of the risks involved, including from the threat of scams.”
Unrealistic expectations
Separate research from Aegon showed that younger generations have higher expectations around investment returns, likely driven by the rise in cryptocurrencies and online trading.
Across the age groups people considered an annual investment return of just under 6% reasonable, but almost a fifth (19%) of those aged 18-34 expected returns above 10%, including 7% who thought annual returns of 15% or more were reasonable.
Aegon said while these figures may reflect investment time horizons between younger and older savers, with younger generations invested in growth assets while older generations typically looking to reduce volatility, the rise of cryptocurrencies and online trading may also be causing the difference in attitude.
The research found that nearly half of younger people (47%) held alternative investments, which included 22% who had invested in cryptocurrencies.
But while younger investors expected higher returns, they were only marginally more willing to accept losses than older generations with only 16% willing to accept an annual loss of 10% or more, compared to 14% across all age groups.
Cameron added: “Interest in cryptocurrencies has increased dramatically in recent years. However, for every individual who has made a profit, there are many who have lost money due to the frequent big swings, both up and down, which many of these assets have experienced.
“We’d strongly encourage people to take advice or at least do some careful homework before making any investment and consider how much risk they can afford to take on. The FCA’s warning that anyone investing in cryptocurrencies should be willing to lose all their money was stark and people need to differentiate money they can afford to lose from the money that will be the basis of their life savings.”
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