This article is part of Morningstar's Guide to Retirement Saving. All this week we are arming you with the tools you need to boost your pension pot and secure the best possible income in retirement.
Emma Wall: Hello and welcome to the Morningstar. I am Emma Wall and here with me today is Simon Hillenbrand, Head of U.K. Retail for Henderson. Hello, Simon.
Simon Hillenbrand: Good Morning, Emma.
Wall: So let's talk about cash. Along with property it seems to be the most favoured asset above all others among U.K. consumers. How bad is the problem?
Hillenbrand: Well, we've done some work in conjunction with some outside parties, and we think it is quite a big problem in fact. We reckon that the U.K.'s investable wealth pools is around £1.4 trillion in size and the study that we've done would indicate that well over half of this is currently held in cash. So that is people having money either cash ISAs, but largely in short-term deposits, the vast majority of which pay well under 1% in terms of interest.
Wall: That’s the thing, if you just look at the basics and take out the human factor, it seems crazy that all this money is in products that barely manage to give you any sort of return. I mean I know inflation is very low at the moment, but it's not going to be low forever and it hasn't been that low in recent history, which means for lot of people they have actually been losing money in real terms and yet that doesn't seem to be have been enough of impetus for them to take on a little bit more risk for considerably more return.
Hillenbrand: No. I think we have to be very careful here, people are generally I think cautious by nature. They've had possibly some bad experiences in the past, investing in the markets. And this is not, absolutely not about telling people they need to sudden load up on risk.
But the risk of holding a lot of cash in a very, very low interest rate, very, very low return environment when other alternatives exist, such as equity or income from equities for example, or income from property or fixed income, does need to be considered, we believe, because this is an opportunity foregone. People could be doing more with their cash putting it to work, generate income which currently is just passing them by.
We've also found rather disturbingly that a lot of people don't actually know the interest rate that they do receive on their cash deposits. So I think there is a general, in many case, I think it's fair to say that most people do need to provide for the rainy day, they need to repair the roof or the car at the margin they probably have too much in cash, which could be perhaps best deployed.
Wall: I mean it does call into question the concept of risk. You know risk really is losing money and if inflation ticks up any more, then you are actually doing that in cash. Whereas what are traditionally thought of as risk assets, could arguably be a safer place to be.
Hillenbrand: I mean again, the big caveat here is that everybody's circumstances are different, psychology – human psychology is what it is. Everybody has their own view. But I think with – you are absolutely right, with very, very negligible interest rates and when you take tax into account as well on cash deposits, you are absolutely right. This is income that is foregone that could be taken in other ways if they invested elsewhere.
Wall: Why do you think people are so cautious because I completely understand if we were sitting here, talking in 2008, 2009, 2010, but we've had more than five years of stock market rally in this country, we've got economic growth. I know an election year is always uncertain, but there has been positive news around for half a decade now. So, why are people still having that mental block?
Hillenbrand: I wonder slightly whether it's about peoples understanding of the wider investment market and the opportunities that exist. So, I suppose it really comes down in a large part to education. A lot of people either don't have saving at all. Clearly they are not the people. Perhaps we're referring to immediately. But I think generally the level of understanding if markets in the country is perhaps lower, then it should be. I think that that is probably direct coronary people understand cash and they understand residential property, they understand where they have roof over their heads, but those are very different I think from the opportunities that exist.
Wall: So whose responsibility is it to educate those individuals? Is it yours? Is it ours in the media? Is it the governments?
Hillenbrand: I think collectively it's everybody's. This is a big – this is a very big issue. I mean clearly the journey for investors is starting at an earlier and earlier age. We need to provide people – they need to provide for themselves in retirement. But even way ahead of that, I think starting in schools, et cetera with financial education is an absolutely key move. I think that's a good start. But we still have lots of people in the middle, who either don't have financial advisors, they are not part of the advice process and they didn't learn about this sort of thing in school. So, I think it is increasingly incumbent on all of us to help the Great British public with their understanding of the investment markets.
Wall: Simon, thank you very much.
Hillenbrand: You are welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
