Will increased flexibility tempt savers into risky investments?

Its national survey shows 42% will start or increase saving when new ISA flexibility rules come into effect in the Autumn and 47% will start when basic-rate taxpayers will be allowed to earn £1,000 tax-free on savings from next April.

However the increase in saving could mean a rise in risk-taking with one in two savers believing the new rules give them the licence to take more risks with their money. Around 10% of savers – equivalent to 1.8 million – say they will definitely take more risk while 40% say they will look at more risky investments depending on circumstances.

That includes investing in peer-to-peer, but research highlighted a lack of understanding of it – just 42% of people claim to be familiar with the term, and of those, 60% were unaware that they had no protection under the Financial Services Compensation Scheme.

Attitudes to returns are also a guide to the potential issues ahead – on average savers are targeting annual returns on savings and investments of 5.30% despite historically low interest rates and recent stock market volatility.

But more than one in three (34%) are targeting an annual return of 6.00% over at least five years with one in eight believing 8.00% or more is achievable without taking into account any need to have access to their cash or potential losses of capital.

Financial advisers are concerned that the new saving and investing rules are likely to lead to more risk-taking without investors understanding the potential for losing money. Around 70% of those surveyed say they believe clients will look to riskier investments. Nearly half (45%) of advisers believe the new rules will increase interest in P2P lending.

Andy Caton, Executive Director at Yorkshire Building Society, said:

“The Government is helping to encourage saving and investment with new rules and looks as if it will be successful with people keen to take advantage of increased flexibility and new tax-free allowances.

“Providers need to match that ambition by helping to encourage responsible saving and investing as there is a genuine threat that enthusiasm for saving and investing will be damaged if people are exposed to unnecessary risks they do not understand.

“Clearly there is evidence from the research that some have unrealistic expectations on the levels of returns they can achieve over the long-term with some people believing 8% a year or more is realistic."