Britons have the lowest appetite among their G7 peers for investing in the stock market, according to a new study that showed personal wealth in the UK was mostly tied up in housing, pensions and cash.
UK savers invested just 8 per cent of their wealth directly into equities and mutual funds compared with 33 per cent in the US and an average of 14 per cent across the remaining five G7 nations, according to an analysis of national accounts by Abrdn.
The asset manager has repeatedly called on the government to encourage share ownership to help stave off what it sees as a crisis in retirement. There are “questions around how far [the UK government] can support an ageing population . . . and retirement pots will increasingly fall short of what people need”, said Xavier Meyer, chief executive of Abrdn’s investment business.
“Personal savings and investments will need to increase to meet this shortfall,” said Meyer, who suggested that Britons could look to other G7 nations for inspiration. “Taking a few lessons from our international neighbours is no bad idea,” he added.
In the US, a “risk-taking culture” and booming local stock market have driven personal wealth into equities, said Laith Khalaf, head of investment analysis at AJ Bell.
The S&P 500 index of large, listed US companies has risen more than 1,100 per cent over the past 30 years, far surpassing similar indices in the G7. Over the same period, the UK’s FTSE 100 index has risen just 135 per cent.
Khalaf added that in the US, a long-standing trend of “people managing their own pensions” using 401(k) plans had encouraged individuals to actively manage their money and invest in equities.
The UK comes top of the pile for pension funds in Abrdn’s analysis: 19 per cent of personal wealth in the country is allocated to pensions, compared with 17 per cent in the US and 6 per cent in Germany, the lowest of the G7.
Chancellor Rachel Reeves has tried to corral pension fund investment into UK shares to reinvigorate British companies and fuel infrastructure projects.
Think-tank New Financial estimated that UK pension funds have slashed their allocation to UK equities from just over half of all assets in 1997 to 4.4 per cent today — among defined contribution schemes the proportion is higher, at 8 per cent.
Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said that UK pension fund money was flowing to global markets because of the higher returns on offer. “That [discourages] companies from listing in the UK, and if fewer companies list, then there’s less opportunity for UK investors because they’re not so excited about the gains.”
The chancellor proposed a consolidation of pension schemes in November to spur domestic investment, but the plans have so far stopped short of forcing funds to invest in the UK.
Around 15 per cent of UK personal wealth is held in cash, in line with the other European G7 nations, but less than half the proportion in Japan, where just over a third of all personal wealth is in the form of cash.
“Japan has been scarred by the period from the late 1980s onwards, when the stock and property markets collapsed,” said Darius McDermott, managing director of advisory firm Chelsea Financial Services. “That was followed by a long period of deflation and low interest rates” that meant savers could hold cash without worrying about its value being eroded, he added.
A recent rise in inflation prompted the Japanese government to introduce larger tax reliefs for investments last year. In January 2024, the Nippon individual savings account (Nisa) — first introduced in 2014 and based on the UK’s Isa — was expanded with more attractive tax exemptions. The enhanced Nisa offers individuals a lifetime tax exemption on equity investments and contribution limits have been tripled.
The UK’s Isa scheme, now over 25 years old and used by over 22mn people, has been lauded as a success — but advisers point out that two-thirds of those hold cash only, according to analysis by AJ Bell, a financial platform, of the most recent HM Revenue & Customs’ data, for 2021-22.
Streeter noted that Isa thresholds have not been increased since 2017. “I think that’s a bit of a disincentive, because if there was a greater tax-free wrapper under which to buy funds in equities, it would encourage more investment in the stock market.”
The UK is largely in line with other European G7 nations on housing, with around half of personal wealth allocated to the asset class — though in countries where house prices are higher, residents may have no choice but to devote a large chunk of their wealth into bricks and mortar.
In the US, only a quarter of personal wealth is in housing, a fact Abrdn’s deputy chief economist James McCann suspects is linked to the “higher equity allocation” among US households and “a bit of scarring from the financial crisis”, which hit the US worse than other housing markets in the G7.
Abrdn’s analysis included the full value of homes held and did not subtract mortgage debt.
Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, said that a “bricks-and-mortar mindset” in the UK together with a strong property market had created a generation of landlords. “And there’s the double benefit of the income that comes from renting that property and the capital growth on your initial investment,” he added.
Yolande Barnes, chair of the Bartlett Real Estate Institute at University College London, said that the “range of wealth” in a country was the most important factor in determining people’s asset allocation.
“Only those in the highest wealth bands tend to use higher risk, higher return investments such as equities in their wealth portfolios,” said Barnes, citing research by the Resolution Foundation, a think-tank. “Mid-range wealth cohorts tend to use real estate — mainly housing — much more,” she said.
The US’s high equity allocation was therefore explained in part by its greater number of wealthy individuals who had a much greater propensity to invest in equities and other high-risk instruments, she added.
Abrdn said its numbers differed from other estimates of asset allocation — such as the UK Office for National Statistics’ Wealth and Assets Survey — because of differences in data sources, methodological assumptions and how asset values are aggregated. It said it had used figures from national accounts as they were “the fairest and best way to compare across countries”.
The asset manager will publish the figures in full on Monday, in its “Tell Sid and tell him again” report on how to encourage retail participation in capital markets.
