It isn’t surprising that we are in this situation. For nearly a decade, savings’ interest rates have pretty much flat-lined.
A whole generation (Gen Y) has grown up and not seen any interest on their savings in their junior bank accounts; little inspiration for saving in adult life.
For the generation above Gen Y, Gen X have never seen the impact of an interest rate hike on their mortgage, if they are lucky enough to have one.
For those nearing the end of their working life, the pension freedoms may seem to have blown in out of nowhere. And, just when you thought it was nearly time to relax, to take your pension and ponder on your life’s contribution to society, a new ‘freedom’ comes your way. Do you take the money and 1) buy an annuity 2) draw down 3) go on a jolly good holiday 4) invest in shares, 5) invest in housing or 6) keep it under the mattress 7) or all of these? And who’s to say?
In summation, everyone seems a little bit baffled. In such times, people need all the help they can get to maximise their incomes. We all need to get a bit better at managing our own money and learn a few lessons along the way.
Where we are now
At the beginning of this year, George Osborne warned that more needed to be done to steer the country in the right direction financially. And, at a household level, it would seem that we are slipping into our old ways again.
In the third quarter of 2015, on average, UK households owed 26.5% of their annual income on loans and credit cards (not taking mortgages into account). This is by far the closest we have been to our 2008 pre-crash household borrowing rate. Isn’t it time we learnt from previous and recent experience?
Why would financial education be a good idea?
Why wouldn’t we all want to be prosperous and live in a country with a flourishing economy? Finding such a land in 2016 is difficult as our problems are global. But financial education could help to sustain us in these difficult times. On a positive note, in 2015, “the total number of people who became insolvent in England and Wales decreased for the fourth successive quarter, to the lowest level since Q3 2005.”
Nobody wants to have no money. Everybody wants to have some spare cash and, towards the end of an industrious life, have a little money with which to retire comfortably. But the problem is that people are struggling just to keep on top of their day-to-day expenses. When it's hard to save it has a knock-on effect on future finances.
Employers can help cultivate a positive mind-set for saving
Research that Equiniti conducted in 2015 found that 81 per cent of the 1,189 full-time UK working employees surveyed, said that they were currently facing a financial challenge in everyday life. This shows that a significant number of working people have money worries.
The same survey also found that 73 per cent of 18-24-year-olds and 78 per cent of 24-35-year-olds said an employee share scheme would change their personal financial planning. 41 per cent of the 18-24 and 36 per cent of the 24-35 grouping said it would make them save regularly for the future. It would seem that providing an employee scheme could be key to 1) changing saving behaviours and 2) demonstrating the benefits that such schemes can provide.
Although employers are not directly responsible for their staff’s finances, we may well see an increased trend in employers providing complementary benefits that address their financial needs. Great Places to Work’s data over the years show brands that actively engage with their employees, which includes the wider welfare and benefits piece, consistently perform better than their peers and outperform the market.
Therefore, there are financial rewards for companies to support employees with matters outside of work. If financial worries are having an impact on staff motivation, it could be highly beneficial to provide financial guidance as an added benefit in the workplace.
Financial education for millennials
From September 2014, financial education has been an integral and compulsory element within the national curriculum for schools in England. It is part of what is called ‘citizenship’ for 11-16 year olds.
This includes topics such as budgeting, managing risk, insurance, public money, income and expenditure, credit and debt and financial products.
This has to be a good step forward for future generations. And there is always scope for parents to put theory into practice with pocket money, with many bartering with their children in return for household chores or good behaviour.
Helping pre-retirees understand their options
Where more help really seems to be needed is at the other end of the work-life journey. For many years, annuities were the only option for receiving a private pension. With the pension freedoms that were introduced last year, the options are more than bewildering. The government has shifted the responsibility onto the individual, empowering them to make their own financial decisions. Yes, the freedoms give great choice but an individual’s ultimate decision may feel like a finger in the air attempt at decision-making. After all, how many of us truly know how long we might live for?
The pensions industry keenly observed the behaviours of the first few months of freedoms to see just what that group would do with their pension pots.
Royal London Insurance found some interesting results (based on 128 people) in terms of what people were intending to spend their drawn-down pension funds on:
35%: Paying off debts, typically their mortgage
22%: Home improvements
15%: Investing, from ISAs to purchasing properties
11%: Buying a car/caravan
11%: General living expenses
6%: Going on holiday
Few of these choices are about providing ongoing income to support the individual through retirement.
It’s also interesting that many who intended to take out a lump sum were not aware that the amount was taxable. Perhaps another indication that additional financial education is needed. So where do pre-retirees go for information? There seem to be few places to turn for advice.
There is the government’s advice service PensionWise for those who have defined contribution pensions. For those with final salary or career average pensions, information about these can be found at: The Pensions Advisory Service and The Money Advice Service.
But with so many changes to pensions over the years, many will be considering speaking with a financial advisor. Others, who may feel vulnerable, may be forced into inertia and instead do nothing. This is the biggest concern. People need support, help and education to enable them to make the very best decisions for their later life.
Addressing the need for education, Equiniti has launched the ‘RetireMe’ App, a pioneering drawdown app aimed, for the first time, directly at consumers. The advanced, user-friendly decumulation modeller enables people to quickly and easily view how long their pension fund might last depending on their drawdown choices, helping them safeguard their financial futures.
This is a standalone app that can be downloaded by anyone for free via the Apple app store – users don’t need to be a member of an Equiniti-administered pension scheme.
In a survey of those who have used the app, 90 per cent strongly agreed that RetireMe helped them make the most of the new flexible retirement rules and 82 per cent strongly agreed it helped them understand when they can retire.
Paul Sturgess, Equiniti’s Director of Pensions Administration and Strategy comments:
We are experiencing a pensions’ revolution. The individual has been greatly empowered and they have never before had such choice or indeed engagement. But with that comes the need for decision-making.
He continues: "It is clear that what is needed in the pensions market right now are tools and products that will enable people to make the right decisions for their own financial futures.
The actual decisions people are planning on making and the absence of provision for ongoing income within that, illustrates the challenge as we move past the golden age of retirement into a prolonged period of serious under provision".
Embedding a self-service culture
At a time when information and access to this information is proliferating faster than at any time in history, there still exists huge gaps in consumer knowledge of money and finances. Through technology, companies like Equiniti can encourage individuals to further engage with their assets to take more active responsibility. Yet, ultimately, it is down to the individual to get financially educated to a level that will aid them throughout their life.
Ignorance is no longer an excuse for doing nothing – the responsibility has been passed to the individual and like it or not, we all need to be responsible for our own financial futures. The earlier we start our own education, the better and it’s never too late. So the lesson learnt today? We should probably all seek a little financial education along the way, no matter how far along life’s path we are.
Equiniti’s RetireMe App can be downloaded free from the Apple App Store here