Britain is facing a savings reality check
◆ Scott Reid on what a post-election government of whatever party must do to improve people's financial resilience
More than 12 million UK households do not have enough in their pension pots for a moderate living standard while 7.3 million don’t have sufficient general savings.
These are among the damning findings of new research by one of Britain’s largest platforms for private investors. The study also found that of the 14 million households with children, over half
(57 per cent) do not have enough life insurance. Meanwhile, there are 1.8 million households in arrears.
The figures will come as a reality check for people who have spent the past couple of years battling soaring food prices, higher mortgage and rental payments, rising motoring costs and little or no wage growth while attempting to squirrel away whatever spare cash they can each month.
Hargreaves Lansdown’s savings and resilience barometer is published as politicians look to sway voters in the run up to July’s general election. The Conservatives have already promised to raise the tax-free pension allowance via a “triple lock plus” if they get back into office.
Interestingly, a separate poll of 1,200 people undertaken by Opinium on behalf of Hargreaves Lansdown (HL) reveals that only about a third of people know that their private or company pension is invested in the stock market. A third said it wasn’t and the remainder said they were unsure. The firm believes that the findings point to a “fundamental misunderstanding” about pensions and could be one reason people do not engage.
So, as politicians and candidates hit the campaign trail, how could the outcome of the election improve people’s financial resilience?
Sarah Coles, head of personal finance at Hargreaves Lansdown, said there were “gaps to close” when it comes to borrowing, saving, investing, buying insurance and building pension pots. “Building a financial system designed to encourage people to do the right thing can help tackle them all,” she noted. “And because it will help us prepare for our own financial future, it will protect any government too - because they won’t end up picking up the bill in years to come when millions of people find themselves falling horribly short.”
The firm said a key step any future government could take is to make the act of saving as easy as paying into a workplace pension. The success of autoenrolment into pensions demonstrates the “power of making preparing for the future simple and frictionless”, it added. Coles said that whoever is elected should look at removing legislative barriers
“If people see their money growing it can make them more likely to boost their contributions Helen Morrissey
to allow payroll saving by default, “so everyone has the best possible chance to build up the savings they may need in an emergency, without really trying”.
The scope of financial guidance and how it is delivered could also be improved upon, according to Coles, amid an ongoing review of the area. “Currently, financial advice is well regulated, but it’s costly and so is only used by a small proportion of people,” she said. “Firms can provide guidance, but can’t currently personalise it, or use it to drive people towards specific outcomes, without it being classified as advice.
“So far, in the review of the boundary between guidance and advice, the Financial Conduct Authority and Treasury proposed a new category of targeted support, so providers could make recommendations based on what ‘people like you’ should do. This would make the information more useful, without crossing the line into advice. A new government has the opportunity to accelerate this process to a conclusion.”
The advent of workplace autoenrolment has been seen as a welcome development and has led to some ten million more people now saving for their retirement. However, it has also created the issue of lost and small pension pots as people switch jobs. With the lost pension problem costing an estimated £26 billion, the research highlights this as a major issue that needs to be addressed if people are to make the most of their retirement.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The lifetime pension has the potential to
transform people’s retirement planning by enabling them to choose the provider where their contributions are paid. This helps them keep track of what they have, which should lead to better retirement decision making. It will also lead to a more competitive market as individuals take more control of their pensions.”
She said people have fundamental misconceptions about pensions, though HL’S survey does suggest that men are more likely than women to know their pension is invested, with almost half (46 per cent) saying so compared to just 25 per cent of women.
“We talk about saving into a pension rather than investing and so it’s highly likely people think their contributions are going into some kind of savings account rather than into the markets,” noted Morrissey. “However, it is a misconception we must address, because it gives us a real opportunity to drive engagement and people’s resilience.
“Helping people to understand that they are investors through their pensions can prove to be a powerful engagement tool. If people can see their money growing over time it can make them more likely to boost their contributions and check in on their pension’s progress. It can also make them more likely to explore other investment options such as stocks and shares ISAS and really help them build their financial resilience overall.”
HL is calling on the next government to implement an overarching review of the pension tax system to ensure people are “incentivised to save without fear of undue complexity”.