It’s an uncomfortable truth but one we need to face up to: Britons are not saving enough.
While many more people are now saving into a pension thanks to the introduction of auto-enrolment in 2012, this is still not enough. Investment company, abrdn, for example, is calling for contributions to workplace pensions to increase (and ideally double) to give people the quality of life in retirement they expect.
“We believe the UK urgently needs to establish a national culture of long-term saving – a ‘Savings Ladder’, if you will, that would encourage people to save and invest for retirement, just as they are already encouraged to save to get on the property ladder,” explains Sarah Moody, abrdn’s Chief Corporate Affairs and Sustainability Officer.
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This July, abrdn began regularly tracking the UK’s saving and investing gap with the launch of its Savings Ladder Index. The first index found that, as a nation, we have a low propensity to save and, particularly, to invest.
Here we unpack what’s contributing to that gap and how to create a nation of successful long-term savers and investors.
Better financial education
Concerningly, the abrdn Savings Ladder Index found that 44% of UK adults have poor financial literacy – extrapolating to around 23.3 million people. This has serious implications for people’s ability to save and invest.
As the index showed, people’s lower propensity to invest than save was partly down to the fact they had a poorer understanding of and less confidence in managing investments compared with savings.
“We believe an urgent rethink of financial education is needed. This should be designed around showing the benefits of investments when saving for the long-term,” abrdn’s Moody adds.
“As part of this, we would like to see mandatory financial education extended, so that children across all four home nations receive it from primary school age to the end of Sixth Form. We’re also calling for the introduction of a new GCSE or sixth form qualification focused on financial skills.”
While policy change would be a big help, there are things individuals can do. For example, those that do invest could make the effort to discuss why and how they do that with friends and family that don’t.
Education around risk tolerance
Any campaign to improve financial literacy should also include some education about risk tolerance – namely, how people can know when they can take a bit more risk with their money.
More than half (55%) of the respondents in the abrdn Savings Ladder Index said they had a low risk tolerance – meaning they’d be holding most of their savings in cash or bonds.
Just 5% of people had a high risk tolerance, which would see them holding mostly stocks. Even among 18-to-34-year-olds, the number was only 8%. This is despite the fact this age group has the longest time horizon for investing and could therefore take the most risk with their money.
“Clearly some education is needed to show people the benefits of accepting higher risk when investing for the longer term and the dangers of leaving money for years in low-paying cash accounts that do not keep pace with inflation,” Moody says.
A re-balancing of property and pensions
Part of the reason that long-term saving and investing has been overlooked appears to be down to our national obsession with property.
Concerningly, almost half (44%) of people in the Savings Ladder Index thought that property was the best long-term investment for their money. Less than a fifth (17%) chose pensions, despite the tax benefits and compound interest they offer.
This is not overly surprisingly given the overwhelming amount of policy support we’ve seen to encourage property buying – from stamp duty holidays to Help to Buy.
Arguably, as a nation, we would benefit enormously from similar support to encourage long-term investing. Cutting stamp duty on UK shares and investment trusts (which is not charged on their foreign counterparts) is one place the Government could start.
More pensions engagement
It’s vital that people start engaging with their pensions – and do so before it’s too late. Checking that you’re on track, scrutinising fees and assessing whether you might want to take more or less risk can make a huge difference to income in retirement.
“At abrdn, we believe both the Government and financial services companies should be looking to introduce more interactive tools to get people engaged with their pensions,” Moody adds. This could include retirement income calculators and being able to plug in other assets like Isas.
A simpler system
For people to engage at all, the system needs to be less complicated. The abrdn Savings Ladder Index found that 14% of people would be saving and investing more if doing so was simpler.
A number of policy changes could help here – from simplifying Britain’s cumbersome Isa system to giving employees the choice when they join a company to pay into a pension they already have.
The immediate personal benefits of saving and investing more are relatively clear to people. However we should not overlook the wider benefits of having a nation of savers and investors.
More money invested means more money going into productive uses – including powering the innovative growth companies of tomorrow, building infrastructure and homes, and finding cures for diseases. Therefore, by closing the long-term saving and investing gap, we can grow the economic pie for everyone.
Learn more about abrdn’s Savings Ladder campaign – including the findings of its Index and its Manifesto policy calls – here.
¹ Based on a nationally representative poll of 3,000 UK adults conducted by Opinium Research for abrdn in May 2024
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