Britons have the lowest appetite among their G7 peers to invest in the stock market, according to a new study which showed that personal wealth in the UK was mostly tied to housing, pensions and cash.
UK savers invested just 8 per cent of their wealth directly in shares and mutual funds compared with 33 per cent in the US and an average of 14 per cent in the remaining five G7 countries, according to an analysis of national accounts by Abrdn.
The asset manager has repeatedly called on the government to encourage share ownership to help avert what it sees as a retirement crisis. There are “questions about how far (the UK government) can support an aging population . . . and retirement pots will be less and less of what people need,” said Xavier Meyer, chief executive of Abrdn’s investment business.
“Personal savings and investment will have to increase to meet this shortfall,” said Meyer, who suggested Britons could look to other G7 countries for inspiration. “Taking some lessons from our international neighbors is not a bad idea,” he added.
In the US, a “risk-taking culture” and booming local stock market have driven personal wealth into stocks, said Laith Khalaf, head of investment analysis at AJ Bell.
The S&P 500 index of large US listed companies has risen more than 1,100 percent over the past 30 years, far outperforming similar indexes 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 trend of “people managing their own pensions” using 401(k) plans had encouraged individuals to actively manage their money and invest in stocks.
The UK tops 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 block pension fund investments in UK stocks to revive British companies and fuel infrastructure projects.
Think-tank New Financial estimated that UK pension funds have reduced 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 the highest high, at 8 percent.
Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, said UK pension fund money was flowing into global markets due to higher returns on supply. “It (discourages) companies from listing in the UK, and if fewer companies list, then there’s less opportunity for UK investors because they’re not as excited about earnings.”
The chancellor proposed a consolidation of pension schemes in November to encourage inward investment, but the plans have so far failed to force funds to invest in the UK.
About 15 percent of personal wealth in the UK is held in cash, in line with other European G7 countries, but less than half the percentage in Japan, where just over a third of all personal wealth is in the form of cash.
“Japan has been damaged 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. “This was followed by a long period of deflation and low interest rates” which meant savers could hold onto money without worrying about its value eroding, he added.
A recent spike in inflation prompted the Japanese government to introduce bigger investment tax breaks last year. In January 2024, the Nippon Individual Savings Account (Nisa) – first introduced in 2014 and based on the UK Isa – was expanded with more attractive tax exemptions. The improved scheme 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 more than 22 million people, has been hailed as a success – but advisers point out that two-thirds only hold cash, according to analysis by AJ Bell, a financial platform , the latest data from HM Revenue & Customs, for 2021-22.
Streeter pointed out that Isa limits have not increased since 2017. “I think that’s somewhat discouraging because if there was a bigger tax-free envelope under which to buy equity funds, it would encouraged more investment in the stock market. “
The UK is largely in line with other G7 European countries on housing, with around half of personal wealth allocated to the asset class – although in countries where house prices are higher, residents may have no choice but to devote a large portion of their wealth to bricks and mortar.
In the US, only a quarter of personal wealth is in housing, a fact that Abrdn’s deputy chief economist James McCann suspects is linked to the “higher distribution of capital” among American households and “few signs of the financial crisis”. , which hit the US worse than other housing markets in the G7.
Abrdn’s analysis included the full value of the homes held and did not deduct mortgage debt.
Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, said an “unstoppable mindset” in the UK coupled with a strong property market had created a generation of owners. “And there’s the dual benefit of the income that comes from renting out that property and capitalizing 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 the distribution of people’s assets.
“Only those in the highest wealth brackets tend to use higher-risk, higher-return investments such as stocks in their wealth portfolios,” Barnes said, citing research from the Resolution Foundation, a think tank. . “Middle-wealth cohorts tend to use real estate — primarily housing — a lot more,” she said.
Therefore, the high allocation of US equity was partly explained by the larger number of wealthy individuals who had a much greater propensity to invest in stocks and other high-risk instruments, she added.
Abrdn said its numbers differed from other estimates of asset distribution – such as the UK Office for National Statistics’ Wealth and Wealth Survey – due to differences in data sources, methodological assumptions and how asset values are aggregated. He said he had used figures from national accounts as they were “the fairest and best way to compare between countries”.
The asset manager will release all the figures on Monday in its Tell Sid and Say It Again report on how to encourage retail participation in capital markets.
