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This article is the latest part of the FT’s Financial Literacy and Inclusion Campaign
A bold promise was tucked away in the Spring Statement this week. Rachel Reeves is seeking to “boost the culture of retail investment” in Britain as she eyes making changes to Isas, the tax-free savings and investment accounts.
I suspect readers will share my pessimism about whether the chancellor can pull this off. Let’s give her the benefit of the doubt, though. Educating the masses about investing is a laudable aim. Given the ticking time bomb of an ageing population who are under-saving for retirement, it’s one that future generations of taxpayers will thank her for.
For now, ignorance is one of the biggest barriers to investing. Almost one in five Britons has never heard of a stocks-and-shares Isa, according to a survey this week by the Investment Association. These are held by an estimated 16 per cent of UK adults, only four percentage points higher than those the financial regulator thinks own unregulated crypto — a problem its new five-year strategy aims to address.
But there is hope. Investors are starting at a much younger age, according to research this week from the World Economic Forum. Nearly a third of Generation Z — those aged between 18 and 27 — in 13 countries have started investing by the time they reach early adulthood, compared with 15 per cent of millennials and just 5 per cent of boomers. The data also found shares were the most popular investment held by Gen Zs.
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The WEF believes the huge popularity of financial content on social media is prompting Gen Z to self-educate about investing more than previous generations, with low-cost trading apps providing a convenient entry point.
Starting young has many advantages — the compounding of investment returns being the obvious one. We also learn by doing and getting familiar with the ups and downs of managing a portfolio in your twenties is better than trying to in your fifties or sixties. Everyone makes mistakes; best to learn from these early when you have less money at stake.
Yet I fear Reeves will make the mistake of conflating the desire to boost retail investors’ participation in the stock market with reforms that would force Isa investors to back UK-listed shares. Financial services companies and other lobbyists have urged her to cut tax breaks for cash Isas or non-UK listed shares. But offering a carrot not a stick is the best way to “support the growth mission”, as she said.
The fact is, Gen Z investors are not that into domestic shares. I asked Freetrade, a UK trading app whose average customer is just 30 years old, for the top 20 investments held by its Gen Z customers. Cheap index funds tracking the S&P 500, Nasdaq and FTSE All-World indices were among the most popular picks in their Isas and self-invested personal pensions, alongside shares in the Magnificent Seven US tech companies, artificial intelligence plays such as Palantir, AMD and MicroStrategy and meme stocks like GameStop.
The only UK investment to make the top 20 (at number 16) was short-dated UK government bonds, which young investors are buying at a discount and redeeming at par.
What if Reeves does listen to those lobbyists who want Isa tax breaks restricted to UK shares? Being forced to swap a global equity index fund for a FTSE 100 or 250 tracker is not a good lesson in building a diverse portfolio. The dwindling number of UK-listed stocks and the lack of tech companies is another problem. So, I fear many younger investors would abandon their Isas for general investment accounts with none of the tax advantages.
That may not present an immediate problem for young investors with small portfolios, but savage cuts to capital gains tax and dividend tax allowances in recent years mean it won’t be long before tax complexity eats into their investment returns.
Scrapping stamp duty on UK shares is a carrot that investment platforms including Hargreaves Lansdown are lobbying for. As a tax that even Isa investors must pay, it raises £4.1bn a year. Removing it could be a self-funding tax cut, boosting the attractiveness of UK shares and hopes that more privately owned UK fintechs, biotechs and defence techs will list in London. Shares with a tech-driven growth story are the sort investors would lap up.
Finally, could Reeves boost the popularity of junior investment Isas by offering parents of newborns a £100 voucher for a FTSE all-share ETF of their choice? The investment industry would seize on the intergenerational marketing potential, nudging more millennial and Gen Z parents to engage with their own long-term investment plans.
Alongside better financial education in schools and universities, spending quite modest amounts of cash on policies to boost the UK’s investment culture would pay dividends for decades to come.
Claer Barrett is the FT’s consumer editor and author of the FT’s Sort Your Financial Life Out newsletter series; claer.barrett@ft.com; Instagram and TikTok @ClaerB
