- Drs Richard Whittle and Stuart Mills explore the UK’s ISA system and behavioural barriers blocking growth in retail investing
- The paper, supported by AJ Bell, concludes the design of the ISA system creates friction and complexity deterring longer-term investments and presenting the Cash ISA as the ‘easy’ choice
- Behavioural factors, including inertia and status quo bias, loss aversion, present bias and mental accounting, contribute to a tendency to favour cash over investing
- Structural barriers in the ISA system risk exacerbating these biases, creating choice complexity and friction between the UK’s multiple ISA products
- Paper recommends moving away from siloed structure in the ISA market, alongside measures to steer consumers toward good long-term ISA outcomes
AJ Bell CEO, Michael Summersgill, says:
“ISAs are incredibly popular but political tinkering means a patchwork quilt of products has been stitched together over time. Starting with a blank sheet of paper nobody would design the system we have now, which labels people either savers or investors, when in reality most need a bit of both.
“This report evidences the case for simplification, illustrating the impact divisive choice and friction in the ISA market has on consumer behaviour. Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing, unleashing the retail investing revolution government has in its sights.
“Faced with excess complexity, people often choose the path of least resistance in the form of cash saving. Whitehall officials may be tempted to try and direct ISA traffic in a new direction with more rules and restrictions designed to manipulate consumer behaviour. Instead, simplifying the roadmap will allow consumers to find their own route into investing.”
Details of the review
A review of the UK’s ISA savings and investment landscape from behavioural economics researchers, supported by AJ Bell, has identified multiple behavioural and structural barriers which exacerbate the tendency to hold cash savings rather than investments.
The review considers a range of behavioural factors which discourage people from investing for the long term and examines how these interact with the design of the UK’s ISA system.
The paper concludes that ‘a complex and siloed structure exacerbates savers’ tendency to short-term cash holdings’, and that simplifying ISA choices and eliminating the binary distinction between cash and investments could remove structural barriers to long-term investing.
The paper, submitted to HM Treasury officials, will inform AJ Bell’s continued engagement with policymakers over future ISA reforms, with the business having long campaigned for simplification of the ISA system. Government has indicated it will reform ISAs to ‘get the balance right between cash and equities’ and ‘boost the culture of retail investment’.
Dr Richard Whittle, says:
“The UK’s ISA system is the cornerstone of household saving, however its evolution into multiple products adds a layer of complexity into saving decisions. A Cash ISA is the default first choice for many – and for many people cash saving is the ideal first step – however money in a Cash ISA tends to stay there. People with longer-term saving needs may benefit from a simpler system where they can hold cash and investments in the same product.”
Dr Stuart Mills, adds:
“This report shows that efforts to reform the UK’s ISAs must account for behavioural biases around risk taking. A smart behaviourally informed ISA product will be essential to encourage customers to move away from cash-only choices.”
Research background
A full copy of the paper (Would people be more likely to invest for the long term if cash/investments were in a single ISA tax wrapper versus separate?) can be found attached. Further information and contact details for AJ Bell and the authors of the paper, Dr Richard Whittle and Dr Stuart Mills, can be found below.
AJ Bell is a UK investment platform with 593,000 customers (as at 31 March 2025) and has campaigned for simplification of the ISA system. The business supported the production of the AJ Bell is a UK investment platform with 593,000 customers (as at 31 March 2025) and has campaigned for simplification of the ISA system. The business supported the production of the paper, inviting authors Dr Richard Whittle and Dr Stuart Mills to test the principle of ISA simplification against existing behavioural science research around consumer choice and decision making behaviours concerning financial products.
The following is a summary of the research:
Summary
The UK’s Individual Savings Account (ISA) system – a fundamental of UK saving policy – has become fragmented into multiple products. Each with its own rules and purpose, but all subject to an overall ISA allowance. These multiple different products become silos, creating separate accounts for different goals and different products requiring separate decisions and processes.
The complexity of the ISA system exacerbates savers’ biases toward short-term savings. Only around 15% of UK adults hold a Stocks and Shares ISA, compared to around a third of UK savers holding a Cash ISA. Indeed, a portion of savers are reported as using Cash ISAs for long-term retirement savings when better products are available.
Several factors contribute to this short-term cash savings bias. Firstly, behavioural barriers make individuals more likely to prefer ‘safe’ cash savings. The real risk of inflation to the value of cash savings is rarely considered. Secondly, the design of the ISA system creates friction and complexity, deterring longer-term investments and presenting the Cash ISA as the ‘easy’ choice.
Behavioural Barriers to Longer-Term Investing
- Inertia and Status Quo Bias: Once money is sitting in a Cash ISA doing nothing is often the easiest thing. People tend to stick to the status quo by default. Around 70% of individuals with more than £5,000 in cash savings have never even considered investing in a Stocks and Shares ISA.
- Loss and Risk Aversion: People generally dislike losses more than they like equivalent gains. This loss aversion makes the potential downsides of investing loom larger than the upsides.
- Present Bias and Liquidity Preference: Savers may give disproportionate weight to immediate needs and access to their money, over long-term growth. Cash ISAs are seen as liquid and readily accessible providing comfort that funds can be accessed at any time. In contrast Stocks and Shares ISAs are often perceived as illiquid.
- Mental Accounting and Categorisation: People mentally separate their savings. Once money is in a Cash ISA it tends to stay there. First choices are often sticky, and switching to a Stocks and Shares ISA is an additional step.
Structural Barriers
The ISA system’s design itself creates barriers to long-term saving.
- Complex Product Choices: There are several ISA variants, each with different limits and rules. Deciding how to allocate money across products can be a further friction in the decision process.
- Separate Accounts and Transfer Friction: Each ISA is a fully separate product; one needs to set up separate accounts if they wish to hold both cash and investments. This administrative process may be a powerful barrier to longer-term investing behaviours.
Recommendations
Reform of the ISA system is required. Presently its complex and siloed structure exacerbates savers’ tendency toward short-term cash holdings. Simplifying ISA choice, eliminating the separation between cash and investments, will remove the structural barriers to long-term saving. Alone this is unlikely to combat the existing behavioural barriers to investment saving, however incorporating informative design principles into the development of any new (combined) ISA product can help steer customers toward good saving behaviours and outcomes.
About the report
This report was authored by Dr Richard Whittle and Dr Stuart Mills in partnership with AJ Bell, a leading provider of investment platforms and services in the UK. It examines the behavioural and structural barriers influencing how individuals in the UK use Individual Savings Accounts (ISAs), with a particular focus on why many savers continue to default to cash products rather than long-term investments.
Dr Whittle and Dr Mills draw extensively from behavioural economics and financial decision-making research to provide insights into the psychological biases, such as inertia, loss aversion, and mental accounting, that shape savings behaviours. The report also identifies key structural frictions within the ISA framework that reinforce these behaviours, presenting a compelling case for policy reform.