Rachel Reeves ‘used unrealistic figures' to persuade savers to invest
Last week, the Chancellor unveiled plans aimed at encouraging savers to put more money in the stock market, including 'targeted support'.
This would allow banks to nudge savers holding cash in low-interest accounts towards higher-performing stocks and shares.
In a report accompanying the Leeds Reforms, the Treasury said that moving £2,000 from low-return savings accounts into investments could 'make millions of people over £9,000 better off in 20 years' time'.
The Government said that £2,000 in the stock market would be worth £12,000 after 20 years, whereas £2,000 in a savings account paying 1.5pc would grow to only £2,700 over the same period. This was based on research which found that the average stocks and shares Isa returns 9.64pc per year.
However, Steven Cameron, of pension provider Aegon, said the figure risked creating 'unrealistic expectations' for savers.
He said: 'To get from £2,000 to £12,000, which is what was in the Government's release, you'd need a compound annual return of 9.37pc after charges.
'If charges were 1pc, you'd need a return before charges of 10.37pc. That looks pretty optimistic as an estimate of likely returns over the next 20 years.'
He continued: 'As a financial services industry, it would be very difficult for us to use figures like this, without many caveats and context. And in some cases, it just wouldn't be allowed by our regulators.'
The Financial Conduct Authority (FCA) sets strict rules to ensure financial promotions are 'clear, fair and not misleading'.
For example, companies must include a disclaimer saying that past investment performance does not guarantee future performance when marketing a financial product.
In addition, the FCA states that pension providers must project three rates of return – low (2pc), intermediate (5pc) and high (8pc).
According to Aegon's calculations, if the Treasury had used the same three rates to calculate future performance, then the maximum projection would be £7,739 compared to the £12,000 figure used in its example.
Mr Cameron said: 'We very much welcome targeted support and the ability to go further to suggest courses of action to groups of customers, such as those with excess cash. But we also need to be realistic in the claimed benefits of investing some of this.'
Sarah Coles, of stockbroker Hargreaves Lansdown, also said the Government could have provided a more 'holistic' view of the options available to savers.
'The choice to compare investment returns to a miserable rate on offer from a high street giant is valid, given how much of people's savings is still languishing in these accounts.
'But the fact is they could do much better by moving to a competitive rate with an online bank or savings platform, and making this clear would have given a more holistic view of their options.
'Having said that, the Government is making a vital point that over the long term, investments will outperform cash in the vast majority of cases.'
Ms Reeves is looking at reforming Isas and savings to boost investment in the UK. The hope is that targeted support, which comes into effect next April, could help some savers take advantage of superior returns.
The Chancellor has put on hold controversial plans to cut the amount a saver can put tax-free into a cash Isa from £20,000 to as little as £4,000.
However, she announced in her annual Mansion House speech that she was still considering 'changes' which could restrict how much can be saved tax-free every year.
She said in last week's speech: 'For too long, we have presented investment in too negative a light, quick to warn people of the risks, without giving proper weight to the benefits, and our tangled system of financial advice and guidance has meant people cannot get the right support to make decisions for themselves.
'That is why we are working with the FCA to introduce a new type of targeted support for consumers ahead of the new financial year.'
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