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At the first investment meeting for a pension fund client I ever attended, the head of investments went through the asset allocation of the portfolio. He talked about fixed interest, property, equities and unquoted stocks. Then he turned to cash. “This is our most dangerous holding,” he declared.
I thought he was just being provocative to prod dozing trustees. He certainly woke me up. But over the years I have come to see the sense of his comments.
One of the biggest long-term risks to pension savings is inflation. In most months since 2010 it has been higher than the Bank of England base rate. Inflation does nasty things to the spending power of your savings. To buy what £10,000 bought in 2016 you would need £13,900 today — nearly 40 per cent more.
Putting it in a typical cash Isa would have helped, but you would still have lagged. Assuming (rather generously) that over the past decade you managed to get 2 per cent a year in your cash Isa, £10,000 would be worth nearly £12,200 today. It would be worth around £16,800 if invested in a portfolio that mirrored the FTSE All-Share during the same period — and about £33,300 if invested in global equities.
That pension fund manager was correct. And yet, to millions of savers, cash is still king. In 2023-24, the most recent data available, 67 per cent of Isa savings went to cash Isas. And 41 per cent of all savings in Isas are held in cash. Savers withdrew £10.57bn from equity funds in the second half of 2025.
To be fair, a cash Isa is arguably a sensible place for your “emergency reserves” pot — which explains a decent portion of this 41 per cent. Some will say they are holding cash back to take advantage of markets plummeting as a consequence of Trump’s Iran war. They call it “keeping their powder dry”. The problem with this is knowing when it’s time to light the fuse on that powder. It’s a cliché, but time in the markets beats timing the markets.
Caution is natural, but I think this is a matter of upbringing, too. We don’t have that same reticence about “bricks and mortar”. The older generation of homeowners will often say that buying their house was the best investment they ever made.
But that was the opposite of holding cash. Say you buy a £400,000 house with £80,000 cash, with the rest in mortgage debt. Your loan-to-asset ratio is 80 per cent. Imagine the housing market takes a tumble and falls by a modest 5 per cent. Your house is now worth £380,000, but you’ve “lost” 25 per cent of your deposit.
Today’s property owners were happy to take that risk at the time they bought. Why are we so averse to other investment risk?
Depressingly, this aversion seems to be spreading. That pension fund I mentioned at the outset has probably sold all of its equities and property and is today holding gilts — low-returning government debt.
Meanwhile, businesses have focused on cash generation to pay down debt and buy back shares rather than borrowing and investing in growth.
This has serious consequences for all of us. For many UK savers, risk aversion will mean an impoverished old age as pensions won’t have grown sufficiently. The lack of investment appetite in companies is impairing productivity and helps explain why we have virtually no economic growth. It’s absolute heresy in economics to suggest interest rates should be cut to reduce inflation, but it could be the case. Over time, falls in interest rates reduce the attractions of cash and lead investors to be more adventurous. They make corporate investment in growth less costly.
Some blame regulation and excessive risk warnings for investor caution. It’s important that investors understand risks, so I’m not complaining about warnings. But I’m pleased to see the Financial Conduct Authority is awake to the long-term dangers for savers anchored in cash. Last month, it issued its priorities for the financial year ahead and was refreshingly keen to encourage investment firms to start explaining the potential rewards as well as risk. It’s also encouraging us to ditch the jargon that deters many from investing.
If you recognise yourself as a cash-heavy saver, what should you do? I’m not an adviser, but they typically suggest keeping at least six months’ salary in reserve to cover against redundancy, the boiler going bang or the car coming off worse from an encounter with a pothole.
If you have a short investment horizon of five years or less, you should probably be tilted in favour of cash. But if you’re saving for the long term, then seriously consider investing in real assets.
I’m not selling my book. Yes, UK equities look like good value and should be part of the mix for most investors. But real assets can include global equities, corporate credit, property, commodities and gold. Diversify.
Also, if you’re worried about piling in just before markets take a plunge, drip-feed money into the markets every month.
The old pension fund manager who thought cash was dangerous achieved very good returns by embracing risk in a well-diversified portfolio of real assets. He considered it the best way to save. He was right.
James Henderson is co-manager of the Lowland and Law Debenture investment trusts.
