Recent research by the Chartered Institute for Securities and Investment has found that many employees, especially young people and children, are at great risk of being insufficiently prepared for retirement. This is due to a lack of financial education and poor access to information about pensions.
The research involved surveys of over 2,000 adults, the majority of whom were either employed or self-employed. Some of the key findings are discussed below.
⇒ Key findings
Of the respondents aged 18 to 24, 10 per cent did not know what a pension was or how they worked. A greater proportion of this 10 per cent were female, suggesting women know less about pensions than their male counterparts. In addition, one quarter of workers aged 55 or above, also did not know how a pension worked.
Approximately 80 per cent of female respondents, and 75 per cent of male respondents, were unaware of the value of their pension.
Over a third of workers, many of them young people, believed that they would not see a fall in living standards during retirement. This shows a lack of knowledge about pensions and savings, as this would only be possible if you saved a large proportion of your income, from a very early age. The majority of people actually see a fall in living standards during retirement. In fact, UK pensioners face the sharpest income drop in retirement compared with pensioners from other OECD countries.
The fact that a large number of people have misconceptions about their quality of life during retirement, means that many do not realise how important it is to save from an early age, and therefore are underprepared for retirement.
Of the 18 to 24-year-olds, nearly one quarter believed living standards would actually increase during retirement. This perception is felt much more amongst young people, compared to just 8 per cent of the total respondents who shared the same view, which suggests that it is young people who are most at risk of being underprepared for retirement.
It is vital that young people know about pensions, savings and investments as early as possible, preferably even before they enter the job market, to avoid any poor financial decisions.
Over half of respondents from this survey said they were unaware of how much they contributed to their pension each month. Around a third, or 43 per cent of women and 28 per cent of men, said they never checked how their pension was performing.
Saving into a pension is just the first step to being well-prepared for retirement. It is also important that you pay attention to the performance of investments within your pension, and the overall value of your pot, so that you can make any changes to the way you save when necessary. Effective planning is required for the best results.
Whilst more than a quarter of males believed that they would be able to retire when they wanted due to effective retirement planning, this was only true for 10 per cent of females.
⇒ Potential solutions
Clearly, employees need better ways of accessing information regarding their pensions, and young people need to be taught from an early age about pensions and how they work, to ensure people make the right decisions regarding their finances. One potential way of increasing access to information is through the use of mobile technology.
“Engagement levels soar when [staff] are offered mobile access to check their pension value and an ongoing financial education programme is offered,” says Nathan Long, senior pension analyst at Hargreaves Lansdown.
It is important that this education starts as early as possible. That is why Young Money Matters specifically targets young people, to get them thinking about finance in good time so that people are well-prepared for retirement. As Sarah Lukeshi, deputy director of the Pensions Policy Institute, says, “the earlier employees start saving, the larger the pot at the end.”
In addition, government policies such as automatic enrolment also help to increase the numbers of people saving into pensions. The recent decision to extend the policy to anyone aged over 18, rather than 22, will mean that approximately 900,000 more young people will be saving into workplace pensions. For more information about automatic enrolment, click here to read an article explaining the policy and how it works.
⇒ Other studies have highlighted similar issues
It is not just this study that has found the extent of the lack of knowledge regarding pensions, similar issues have been highlighted in other research too.
A study by the Chartered Institute of Personnel and Development found that 36 per cent of respondents did not know that to receive the minimum state pension, one must first pay 10 years of National Insurance.
10 per cent did not know how they would fund their retirement and more than half had no idea about how much they paid into their pension pots each month.