Savers are turning to cash ISAs for retirement saving despite the long-term benefits of pensions products

Despite the much-reported successes of auto-enrolment, less than a third of people are using workplace pensions to save for retirement.

While saving through a workplace scheme is just about hanging on to the number one spot, cash ISAs are hot on the heels with only 1% fewer people choosing them, according to research from Aviva.

Mattress-money

In some ways this is not very surprising. ISAs continue to rise in popularity and they are a product that people trust.

In particular, cash ISAs were much more popular than their stocks and shares counterparts, despite the latter helping long-term savings to grow, instead of falling behind inflation.

Top ways to save for retirement

1. Employer pension (29%)

2. Cash ISA (20%)

3. Bank / building society account (18%)

4. Private pension (15%)

5. Cash savings e.g. piggy bank (8%)

6. Stocks and shares ISA (7%)

7. Property (7%)

8. Stocks and shares (non ISA) (6%)

9. Premium bonds (6%)

10. Antiques, artwork etc (2%)

Rodney Prezeau, consumer platform managing director for Aviva explained: “To put this in context, £100 invested 10 years ago in a cash ISA would be worth £124 today, but would only buy £92 worth of goods in 2005 terms. In other words, by investing in a cash ISA over the last 10 years, someone’s spending power has fallen by 8%. But if £100 had been invested instead in a stocks and shares ISA, which in turn is invested the FTSETM All Share*, this would be worth £177 in 2015 which would have spending power of £132 in 2005 money – an increase in spending power of nearly a third.

“This illustrates how, over the long term, investing in shares can help money to keep pace with - and even beat - inflation.”

Despite this, stocks and shares ISAs came in a disappointing sixth place – behind the piggy bank!

The popularity of cash ISAs is worrying news for the workplace pensions industry”

This demonstrates that many people mistrust the investment industry or are unwilling to engage with it to the extent that they would rather keep their money under the mattress or in ‘safe’ cash ISAs.

The popularity of cash ISAs is worrying news for the workplace pensions industry, particularly at a time when the competition with retail products is fierce, and the future of pensions tax relief legislation is uncertain.

Clearly if more is not done to promote both private and workplace pensions they could be eclipsed by retail products.

One solution could be to better promote the concept of ‘money for nothing’ in terms of the contributions people will receive from their employers if they save in a workplace pension.

If more is not done to promote both private and workplace pensions they could be eclipsed by retail products”

On the Pensions Awareness Day bus many people had no idea that their contributions would be matched by their employer. When they learnt more, they were far more engaged and interested in investing in a workplace pension.

We also need to change the way talk about things. Instead of talking about ‘matching contributions’, we should explain to people that if they save in pensions they will automatically double their money (through employer contributions).

Doubling your money from the outset is automatically a better result than if you’d put the money in a cash ISA, and that’s before you’ve even looked at possible investment returns.

Using language like this not only helps people understand why they should be saving for retirement, but also why a workplace scheme is the appropriate vehicle in which to do this.

Doubling your money from the outset is automatically a better result than if you’d put the money in a cash ISA”

However this alone will not deal with the underlying fear and mistrust of the investment industry.

Pensions has long been battling its troubled reputation, and studies such as this one show how stark the competition with the retail industry has become as a result.

Transparency and education will be paramount in convincing people that they can trust in the industry, and that their money will be at least as safe as it would be under the mattress.