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With increasing life expectancies and a shift from defined benefit (DB) to defined contribution (DC) pensions, it’s becoming more difficult for people to ensure their finances last them through their later years.

This challenge is set to be even harder for many UK working adults who are still hesitant to invest in stocks and shares and with too much of their money held in cash.  

Understanding why people feel hesitant to invest 

According to a recent LV= Wealth and Wellbeing survey, one in three savers aged 35-54 aren’t investing because they don't believe their money will be safe - which is particularly alarming as this is a crucial age for building retirement savings. 

And amongst the younger generations that have considered investing, there is still a growing preference for cash savings with research showing 85% of the British public would prefer to keep their money in a typical savings account ¹. This reluctance to invest could stem from the innate human bias to avoid losses (loss aversion) and a lack of understanding or concerns about market volatility - or a combination of both.

Rising living expenses are further influencing people's decision to prioritise cash savings, to ensure they have easy access to cash in an emergency. In 2024, the percentage of people in the UK who stopped or reduced saving/investing as a result of increasing living costs has risen to 44% ². And while it’s important to hold at least six months living expenses in cash as an emergency fund, reducing the amount invested each month or accessing pensions earlier than intended could have a significant impact on financial resilience later in life if this is continued to be used as a longer term savings strategy.

What are the long-term impacts of short-term thinking?

It's understandable people want to focus on access to cash in the short term, but there are many downsides to holding too much cash savings for the long-term. These include more vulnerability to inflation and reduced compound growth opportunities, increasing the risk of shortfalls in retirement income, especially with enhanced life expectancy. 

Over time, this short-term approach can lead to missed opportunities for wealth accumulation.

When thinking long-term, we know that investing in stocks and shares typically offer higher returns and better protection against inflation compared to cash savings, but it does come with greater short-term volatility and risk. While cash savings could provide stability and ease of access, it can struggle to keep up with inflation over longer periods, potentially eroding purchasing power. Comparatively stock market investments have historically shown a higher likelihood of beating inflation when held for longer timeframes ³.

A more balanced approach to financial planning

The power of financial education and good advice will need to lead the way in helping people better achieve a better balance to their investments. By addressing the knowledge gap through education and exploring balanced investment strategies that offer both growth and stability, advisers can help people make informed decisions that align with their long-term objectives and short-term needs and fears. Recent research shows that having a better understanding of these missed opportunities or the potential growth projections could help more people feel confident about investing their money ¹.

The fundamental role of financial education products will also have a key role to play as people look for more innovative solutions. After all, the innate human desire to avoid losses won’t change and research shows that nearly half of future retirees want to see their savings grow steadily without dramatic fluctuations.

Smoothed Managed Funds could be a great way to help risk averse younger and middle-aged investors build confidence in long-term stocks and shares investing by providing added stability during market turbulence – taking a 26-week average to reduce volatility without impacting growth potential for a calmer investor journey. 

Please always remember that our smoothing process helps to reduce the impact of market volatility, but it won’t prevent your client’s investment from dropping in value and they could get back less than they invested.

Sources:

LV= Wealth and Wellbeing report (June 2024) 

¹Fear of investing: Dispelling investment myths | Wealthify.com 

²Cost of living crisis impacting savings and investments, FCA finds - FTAdviser 

³With cash earning 5%, why risk money on the stock market? (schroders.com) 

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