A complex and siloed ISA structure is pushing savers towards short-term savings over longer-term investing, research from AJ Bell has found.
The research, conducted by Dr Richard Whittle and Dr Stuart Mills, looked at the UK’s ISA system and behavioural factors which discourage people from investing for the long term.
It found that the design of the ISA system creates friction and complexity deterring longer-term investments, making the cash ISA the “easy” option.
AJ Bell said the current ISA regime, made up of several ISA variants with different limits and rules, can make it difficult to decide how to allocate money across products. Additionally, the need to set up separate accounts if someone wishes to hold both cash and investments can prove a “powerful” barrier to longer-term investing, the research found.
Michael Summersgill, CEO of AJ Bell, said: “ISAs are incredibly popular but political tinkering means a patchwork quilt of products has been stitched together over time. Starting with a blank sheet of paper nobody would design the system we have now, which labels people either savers or investors, when in reality most need a bit of both.”
AJ Bell said behavioural factors, including inertia and status quo bias, loss aversion, present bias and mental accounting, also contribute to a tendency to favour cash over investing.
Only around 15% of UK adults hold a stocks and shares ISA, compared to around a third of UK savers holding a cash ISA, with a portion of savers reported as using cash ISAs for long-term retirement savings when better products are available.
Around 70% of individuals with more than £5,000 in cash savings have never even considered investing in a stocks and shares ISA.
Summersgill said: “This report evidences the case for simplification, illustrating the impact divisive choice and friction in the ISA market has on consumer behaviour. Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing, unleashing the retail investing revolution government has in its sights.
“Faced with excess complexity, people often choose the path of least resistance in the form of cash saving. Whitehall officials may be tempted to try and direct ISA traffic in a new direction with more rules and restrictions designed to manipulate consumer behaviour. Instead, simplifying the roadmap will allow consumers to find their own route into investing.”
Dr Richard Whittle says: “The UK’s ISA system is the cornerstone of household saving, however its evolution into multiple products adds a layer of complexity into saving decisions. A Cash ISA is the default first choice for many and for many people cash saving is the ideal first step, however, money in a Cash ISA tends to stay there. People with longer-term saving needs may benefit from a simpler system where they can hold cash and investments in the same product.”
AJ Bell said simplifying ISA choice and eliminating the separation between cash and investments would remove the structural barriers to long-term saving. While it is unlikely to combat existing behavioural barriers to investment saving, AJ Bell said incorporating informative design principles into the development of any new, combined ISA product will help steer customers towards good savings behaviours and outcomes.
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