Earlier this year, we surveyed 2,000 UK employees about their attitude towards retirement, their expectations in retirement around the amount of money they will have, and who should fund their retirement.
The results threw up a few known facts.
Financial advisers know that people can disengage with their retirement because it feels too complicated and the language is unfamiliar. We also know that people’s expectations of their retirement standard of living and the provisions they’ve actually made can be quite far apart – we see that among people who consider themselves to be prepared too, so this isn’t a surprise.
Areas we wanted to explore in the research were linked to how we think the attitude towards retirement can be shifted without just relying on telling people over and over that they’ve got a problem and need to address it.
Failure to understand the role of risk
The first part was to understand how people view risk in relation to the investment of their retirement savings. We put a hypothetical scenario to our survey respondents where we asked:
You have £100,000 to invest into a pension for your retirement and have to decide what level of risk to take with your money.
The higher the level of risk the greater the potential return but also the greater the likelihood you will see the value of your pension pot fall during that time.
We used some typical risk profiles to inform the scenarios with the ‘riskiest’ reflecting an 80/20 high risk/ low risk portfolio and the ‘safest’ in a reverse 20/80 portfolio. With only 9% choosing the riskiest portfolio, we found that the population is risk averse when building up pension savings, when this was their chance to work with the risk to increase their pots.
Given that most employees are invested in their workplace pension’s default fund, which doesn’t consider their retirement goals, millions of employees are not setting goals, not assessing the suitability of their retirement plans and not taking action to change it.
The word ‘risk’ could just have too many negative connotations for people to embrace in the way they need to in order to maximise the potential of their savings. Headlines that shout about lost savings, risky ventures and scams might have scared a generation of savers who prefer to have something rather than nothing. However, the historic performance of equity markets suggests the only way to substantially boost savings is through investment, albeit with the tutelage of an expert. They will need people to reassure them, especially at the early stages of their career, that it’s a long-term game and over time, equity markets do perform.
Related to this is the fact that a lot of young people think cash savings are going to pay for their retirement. Given the tax benefits of saving into a pension, it makes little sense for young people to prioritise cash savings but terms like ‘tax relief’ are alien. It’s a positive move by the government so it could to be called something positive, like a ‘tax boost’.
Working through retirement
We then wanted to assess attitudes towards the concept of retirement. According to our research, Britons don’t plan to retire any time soon, with 61% agreeing with the statement that the concept of retirement is outdated. This is backed up by 66% of our research panel saying they plan to fund their retirement with work, either full time, part time or contract.
As financial planners, it’s hard not to think that if UK employees had a guide to help them make realistic retirement objectives and a plan to achieve them, they would change their view of retirement.
We asked our research panel what their best piece of advice for younger generations would be and the most popular answer (44%) was saving into a pension earlier, followed by generally saving more when younger.
Cost seen as the biggest barrier but there’s value to be had
So what’s stopping people engaging an adviser? 13% of people regret not taking professional financial advice with a further 18% wishing they could give that piece of advice to their younger self.
One of the biggest barriers identified by 30% of people was that professional financial advice is perceived to be too expensive and, according to a further 16%, it’s only suitable for the wealthy.
We know that isn’t the case and the value of financial advice far outweighs the costs in the vast majority of cases, according to research released last year, by an average of £47,000 over a decade.
44% would advise younger generations to start saving into a pension earlier
Reality puncturing dreams
One of the ways we tried to get people to focus on what their retirement might look like was to imagine their ‘bucket list’ – essentially, the life goals they want to achieve.
But the gap between dream and reality was clear, as 24% don’t think they will be able to afford their bucket list. Travelling the world, building their dream home and learning new skills featured on the most popular items in our retirement bucket list.
Five typical items on a list added up to £10,000 for a couple, meaning they would need a substantial amount of spare cash to achieve their goals:
- Explore the Galapagos Islands
- Visit the Grand Canyon
- Walk the Great Wall of China
- Go on Safari
- See the Northern Lights
Given that our population of employees were so uncertain about how they would pay for their retirement and when they might retire, there might be plenty of items left unticked on the list.