The complexity of the Isa process is pushing savers towards short-term saving over investment, research from AJ Bell has revealed.
The research, conducted by Dr Richard Whittle and Dr Stuart Mills looking at the Isa savings and investment landscape, found that only 15 per cent of UK adults hold a stocks-and-shares Isa, compared to around a third of savers who hold a cash Isa.
It attributed this disparity to complexity, pointing out that the Isa system has become “fragmented into multiple products”, creating separate accounts for different goals and products requiring separate decisions and processes.
AJ Bell CEO, Michael Summersgill, 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.
“This report evidences the case for simplification, illustrating the impact divisive choice and friction in the Isa market has on consumer behaviour.”
Summersgill added that removing complexity could play a “crucial role” in smashing the psychological and material barriers between saving and investing.
He argued that this could “unleash” the retail investing revolution government has in its sights.
Barriers
The report detailed that behavioural barriers to longer-term investing included inertia and status quo bias, explaining that, once money is sitting in a cash Isa, doing nothing is often the easiest thing.
It detailed that around 70 per cent of individuals with more than £5,000 in cash savings have never even considered investing in a stocks-and-shares Isa.
Another barrier identified was loss and risk aversion, as people generally dislike losses more than they like equivalent gains, thus making the potential downsides of investing looming larger than the upsides.
The final two barriers identified were present bias and liquidity preference, as savers may give disproportionate weight to immediate needs and access to their money, and mental accounting and categorisation, as people mentally separate their savings.
Additionally, the report also discovered structural barriers to long-term saving created by the Isa, such as complex product choices causing further friction in the decision process, and separate accounts and transfer friction.
Action
Therefore, AJ Bell’s report issued several recommendations on how to improve the Isa process such as simplifying Isa choice.
It argued that this would eliminate the separation between cash and investment and remove the structural barriers to long term saving.
While it acknowledged that this is unlikely to combat the existing behavioural barriers to investment saving, it pointed out that incorporating informative design principles into the development of any new Isa product can help steer customers towards good saving.
tom.dunstan@ft.com
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