Britons have the lowest interest among their G7 peers in investing in the stock market, according to a new study which showed personal wealth in the UK is largely tied up in housing, pensions and cash.
UK Guardians planted only 8 percent of their wealth directly in stocks and mutual funds compared to 33 percent in the US and an average of 14 percent in the five remaining G7 countries, according to an analysis of country accounts by Abrdn.
The asset manager has called on the government to encourage share ownership to help prevent what it sees as a crisis in pensions. There are “questions about how much (the UK government) can support older people . . . and pension pots will fall further short of what people want”, said Xavier Meyer, chief executive of Abrdn's investment business.
“Personal savings and investment will have to increase to meet this deficit,” said Meyer, who suggested the British could look to other G7 nations for inspiration. “Taking a few lessons from our international neighbors is not a bad idea,” he added.
In the US, a “risk-taking culture” and a booming domestic stock market have driven personal wealth into equities, said Laith Khalaf, head of investment analysis at AJ Bell.
The S&P 500 index of the largest US listed companies has risen more than 1,100 percent over the past 30 years, significantly outperforming similar indexes in the G7. Over the same period, the UK's FTSE 100 index rose just 135 percent.
Khalaf added that in the US, the long-term trend of “people managing their pensions” using 401 (k) plans has encouraged people to manage their money and invest in equity.
I in the UK comes to the top of the pile of pension funds in Abrdn's analysis: 19 percent of the personal wealth in the country is allocated to pension funds, compared to 17 percent in the US and 6 percent in Germany, which is at the bottom of the G7.
Chancellor Rachel Reeves has tried to cash in on the pension fund for UK shares to revive British companies and fuel infrastructure projects.
Think Tank – New Money has estimated that UK pension funds have reduced their share of UK equities from more than half of total assets in 1997 to 4.4 per cent today – among defined contribution schemes the ratio is high, in 8 percent.
Susannah Streeter, head of finance and markets at investment platform Hargreaves Lansdown, said UK pension funds are entering global markets because of the high returns available. “That (discourages) companies from listing in the UK, and if there are fewer companies listing, then there is less opportunity for UK investors because they are less excited about the profit.”
The chancellor proposed that a to strengthen of pension schemes in November to encourage domestic investment, but plans have stopped short of forcing money to invest in the UK.
Around 15 per cent of personal wealth in the UK is held in cash, in line with other European G7 nations, but less than half the proportion of Japan, where more than a third of all personal wealth is in cash.
“Japan has been damaged in the period from the late 1980s onwards, when the stock and property markets collapsed,” said Darius McDermott, managing director of the consulting firm Chelsea Financial Services. “That was followed by a long period of inflation and low interest rates” that meant savers could hold money without worrying about its value eroding, he added.
The recent rise in prices has prompted the Japanese government to introduce a large investment tax rebate last year. In January 2024, the Nippon savings account (Nisa) – which was introduced in 2014 and is based on the UK Isa – was extended with an attractive tax exemption. The extended Nisa provides individuals with lifetime tax exemption on equity investments and contribution limits are tripled.
The UK Isa scheme, now more 25 years old and used by more than 22mn people, it has been hailed as a success – but advisers point out that only two-thirds of those hold cash, according to an analysis by AJ Bell, a financial platform, of the latest HM Revenue & Customs data. , in 2021-22.
Streeter noted that Isa thresholds have not been increased since 2017. “I think it's a bit of a disincentive, because if there was a big tax wrapper for buying money in equities, it would encourage more investment in the stock market.”
The UK is largely in line with the rest of the G7 European nations in terms of housing, with around half of people's wealth allocated to the asset class – although in countries where house prices are high, residents may have no choice but to give away a large amount of their wealth. bricks and mortar.
In the US, only a quarter of people's wealth is at home, a fact Abrdn's deputy chief economist James McCann suspects that it is linked to the “high distribution of shares” between US households and the “slight deterioration of the financial crisis”, which has hit many people. The US is worse than other housing markets in the G7.
Abrdn's analysis included the full value of the foreclosed home and did not remove the mortgage debt.
Myron Jobson, senior financial analyst at investment platform Interactive Investor, said the “bricks-and-mortar mentality” in the UK and the strong property market had created a generation of landlords. “And there is a double benefit of income from renting that property and capital growth on your initial investment,” he added.
Yolande Barnes, chair of the Bartlett Real Estate Institute at University College London, said the country's “wealth hierarchy” is the most important factor in determining the distribution of people's assets.
“It's only the wealthiest groups that like to use high-risk, high-return investments like equity in their wealth portfolios,” Barnes was quoted as saying. google is the Resolution Foundation, a think tank. “Middle wealth groups tend to use real estate – especially houses – more,” he said.
The high allocation of US equity was therefore explained in part by the high number of wealthy individuals who were more interested in investing in equities and other high-risk instruments, he added.
Abrdn said its figures differ from other asset allocation estimates – such as the UK's Office of National Wealth and Asset Research – due to differences in data sources, methodology and how asset values ​​are compiled. It said it used figures from national accounts as “the best and most appropriate way to compare across countries”.
The asset manager will publish the full figures on Monday, in its “Tell Sid and Tell Him Back” report on how to encourage market participation in the capital markets.