The BBC reports that up to half a million UK households are currently at risk of falling in to problem debt which could be tackled by having just £1,000 in contingency savings (1). In addition, significant changes to the state pension system could see a greater reliance on private savings and investments in later life for thousands. The UK therefore really does have a savings crisis; indeed, the Department for Work and Pensions estimates 11 million of the UK’s working age population have inadequate savings for later life (2). In 2015 just 56% of the adult population were saving adequately for retirement (6). In a 2013 report, Scottish Widows (5) found that, over the previous 5 years, UK adults saved approximately £600 less per year with 31% failing to save all together. How then do we expect to be able to retire comfortably?
A national poll (6) found that Britons believe they will need an average of £23,000 per year after tax to enable them to retire comfortably. The Office of National Statistics reports life expectancy by 2039 to reach 93.9 years for males and 96.5 for females (9). Therefore, to achieve a comfortable retirement for 30 years with a state pension at 2% interest (8) above the current BoE base rate (0.5%)(7), over 45 years, a 20-year-old must save £700 per month. If that’s not possible (which for the majority it is not) then some of their options are as follows:
- Save and work for longer
- Expect less money per year during retirement and sacrifice lifestyle
- Look for more aggressive rates of return, accepting the potentially higher risks
The current state of things
Pension reform suggests the government now recognises that which economists have warned for years. In a 2009 DWP research report (3) it was found that under the “old” state pension system 5% of savers would actually be at risk of receiving less than they had saved due to inflation whereas 70% could have received up to double. The expectancy is, under a state-backed pension scheme, that returns would be guaranteed and calculable, but now the reality dawns that returns are not guaranteed and raises the question: what is the advantage of a state pension scheme compared to multiple savings and investments pots?
Sophisticated investors have often sought to spread their investments across multiple asset classes and terms to mitigate their risk (4). It was left to them to build portfolios in search of higher rates of return where the average retail investor kept to work and state pension schemes. Now the tide is changing towards less reliance on traditional schemes and more must be done to make building a diverse portfolio accessible to all.
‘Risk profile’ is the single largest contributor to savers’ aversions to investments (5). Although not necessarily true, this illustrates that UK adults feel “savings” have a smaller risk profile than “investments”. According to Scottish Widows (5), guaranteed yet smaller capital growth in addition to deposit protection was seen as the most favourable from a selection of investments/savings compared to a product with 100% potential capital growth over 5 years but with risk of losing it all.
Compare this to our American cousins and we can begin to understand why the UK economy initially suffered from the 2008 economic crash to a greater extent than the United States (11) i.e. attitudes towards and reliance on traditional banking deposits (12). Arguably the highest profile and most successful investor in history, Warren Buffet of Berkshire Hathaway offers a predominantly aggressive proactive approach to investing which may offer some insight in to how the UK could evolve its mentality to combat the pension crisis. For example, £1,000 invested in Berskshire Hathaway itself 45 years ago would be worth over £4.6million today according to Business Insider (10). This demonstrates much greater growth, albeit with greater risk, and appears to be more affordable in terms of deposit than the current UK state pension scheme.
We believe that a cultural change therefore must happen for adults to be able to enjoy a retirement lifestyle that they have spent 45 years working towards without dramatically compromising their day-to-day lifestyle during working life. As an example of how a more aggressive investment approach at a higher potential interest rate than the UK state pension, see the article HERE on compounding with projections of how regular monthly deposits on Property Moose could contribute to your retirement savings pot. Simply, the aforementioned pension deposit figures are deemed to be unaffordable for the average UK adult and therefore we believe that Britons should consider a more aggressive investment approach to ensure a comfortable retirement.
Disclaimer and Legals
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).
References
- http://www.bbc.co.uk/news/business-33791140
- https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/223061/enabling_and_encouraging_saving.pdf
- Department of Work and Pensions Research Report 558, Saving for retirement: Implications of pensions reforms on financial incentives to save for retirement, 2009
- http://www.bankrate.com/finance/financial-literacy/asset-allocation-helps-mitigate-risk-1.aspx
- http://reference.scottishwidows.co.uk/literature/doc/2013_sandi_report
- http://www.scottishwidows.co.uk/extranet/working/about/reports/pension-report
- http://www.barclays.co.uk/mortgages/base-rate-information-calculator#/base-rate/step1
- https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf
- http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/rel/lifetables/past-and-projected-data-from-the-period-and-cohort-life-tables/2014-based/stb-2014-past-and-projected.html
- http://uk.businessinsider.com/warren-buffett-berkshire-hathaway-historical-returns-2015-3?r=US&IR=T
- http://uk.businessinsider.com/britain-economic-recovery-v-the-united-states-2015-8
- https://www.economicshelp.org/blog/7501/economics/the-great-recession/
