The UK savings system is failing us - and we could do very much better

SUMMARY

Richard Murphy, political economist and author, critiques the current UK savings system dominated by ISAs and pensions, arguing it fails to deliver productive investment or societal value. He proposes a government-led alternative that channels savings into socially beneficial projects, emphasizing accountability and public purpose.

MAIN POINTS

• The majority of UK savings are held in ISAs and pensions, but their effectiveness for national benefit is rarely questioned. [1:01]
• Current savings practices do not fund productive investment, with most pension and ISA funds invested overseas or in existing assets. [4:00]
• The government heavily subsidizes savings through tax reliefs, yet much of the benefit accrues to the City of London rather than savers or society. [8:01]
• Murphy proposes that the government expand National Savings and Investments, offering safe, purpose-driven bonds for social investment. [11:00]
• He advocates for savers to choose the social purpose of their investments, with government accountability and reporting on the use of funds. [15:00]
• Redirecting savings into productive, socially beneficial assets would strengthen the economy and society, redefining wealth as collective well-being. [19:00]

DETAILED ANALYSIS

The UK savings system, as currently structured, is dominated by ISAs and pension funds, which together account for more than 80% of personal savings. Despite the scale of these vehicles, their actual contribution to productive investment in the UK economy is minimal. Economic theory traditionally holds that savings should fund investment, thereby increasing the productive capacity of the economy for current and future generations.

However, in practice, most UK savings are held in cash, which does not contribute to economic activity, or are invested in speculative activities such as trading existing shares or properties, rather than creating new assets or infrastructure.

A significant portion of pension and ISA investments are directed overseas, particularly to the United States, with only a small fraction supporting UK businesses or development. The purchase of shares by pension funds is largely confined to existing, 'secondhand' shares, which does not equate to new capital formation. Similarly, pension funds often trade in existing real estate rather than financing new construction.

This disconnect means that the vast pool of UK savings does not translate into increased investment or societal benefit, representing a fundamental failure of the system.

The government provides substantial subsidies to encourage saving, with ISAs receiving nearly £10 billion annually in tax relief and pension tax reliefs exceeding £70 billion per year. These subsidies are intended to incentivize saving for retirement and future needs, but in practice, much of this public money ends up supporting speculative financial activities in the City of London. Returns to savers are often disappointing, with ISA accounts typically offering lower rates than other savings products and UK pension returns lagging behind international counterparts.

The result is a system where public funds subsidize private financial markets without delivering meaningful returns or investment in the real economy.

Murphy argues that the core purpose of savings should be capital formation—building the assets, skills, infrastructure, and ecological systems that underpin societal well-being. He contends that the market has failed to deliver this outcome and that it is now essential for the government to intervene. He proposes that the government expand National Savings and Investments (NS&I), which currently holds around £250 billion in savings, by offering new, secure savings products linked directly to social purposes such as health, housing, education, green investment, and regional development.

These products would offer competitive, guaranteed interest rates and familiar terms, and could be integrated into ISAs and pensions, with tax reliefs contingent on investing in these socially responsible bonds.

A key feature of the proposal is allowing savers to choose the specific social purpose for their funds, such as NHS bonds, housing bonds, or regional development bonds. This would reestablish a direct relationship between individual savings and collective investment, with government accountability ensured through transparent reporting on how funds are used. The approach reframes savings not as a private accumulation of wealth but as participation in the creation of public value and societal resilience.

Redirecting savings away from speculative markets and into productive investment would not only reduce the influence of the City of London but also promote regional equity and strengthen public services. The anticipated economic boost and increased tax revenues could offset the cost of providing guaranteed returns to savers, making the proposal fiscally sustainable. Ultimately, Murphy envisions a system where savings contribute to the common good, redefining wealth as the collective assets and capabilities that support a thriving society.

LINKS

• Poll related to the video topic.
• Transcript and additional resources on Richard Murphy's blog.
• ChatGPT prompt for writing to MPs about the issues discussed.
• Donation page to support Richard Murphy's work.
• Richard Murphy's Bluesky social profile.
• Richard Murphy's Funding the Future blog.
• The Wealth Series playlist.
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• Channel introduction video.

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