Financial literacy and life planning

Posted by Stuart Royston

Why do so many Britons fail to plan their money for retirement? Why do so many households reach retirement age with little or no wealth?

Financial planning for later life

Everyone needs to plan in the short, medium and longer term. We are all living in a more complex and uncertain world and this means that we must have our sights set on medium and long term goals while we are coping with the immediate challenges and pressures.

Our plans will need revisions in the light of short term shocks and changing priorities during the life course but a plan is essential.

What we know

  • We know that we are living longer and can now expect to spend one third of our lives in retirement.
  • We know that we are living in an ageing society. There will be a lot more older people in the future than there are currently.
  • We know governments of all colours expect individuals to take greater responsibility for their own affairs.
  • We know employers are closing generous final salary pension schemes in favour of money purchase schemes in which the risks of providing an adequate pension are transferred from the employer to the individual.

Despite all this we also know that people are not taking control of their financial affairs, are not planning for the future, and are not adequately preparing for retirement. There is an unfounded confidence among individuals that they will have a good retirement even though they are not taking the necessary steps to achieve it. As we are living longer, healthier lives retirement should be a rewarding part of life, full of fulfilment and activity. But half of those in work are not saving for a pension or providing for an income after they cease working. Even when an employer makes a contribution to an occupational pension scheme participation rates can be disappointingly low. Women are particularly at risk with broken pension records and the belief that they can rely on their husband’s pension contributions despite warning signs that this might not be a satisfactory approach.

Why are individuals so bad at planning their lives, do not manage their short term financial affairs through a household budget, and fail to plan for an income in retirement when it is so obvious that these are essential elements of every day living?

We live in a consumer society in which short term consumption with high levels of personal debt and the risk imposed by high debt are more valued than long term planning and saving before purchasing. We also know that when it comes to taking financial decisions individuals are held back by a lack of understanding about financial issues; and by prejudices and emotional hurdles. Individuals do not take financial decisions in a rational way. Those in the financial services industry know this and an explanation of this non rational economic behaviour can be found in the increasing body of behavioural economics knowledge.

For young people retirement looks to be a long way off; there is no understanding or certainty of what life will be like when they reach retirement; and lots of more compelling competing priorities such as getting on the housing ladder, repaying student debt, or coping with a new family when household income is under pressure through the absence from work of the new mother or the high cost of childcare.

Those in mid life might have a clearer view of their long term saving needs. They might also start to recognise the need for a life plan that plots their way through the life course and helps them think about how and when to retire as well as taking on board the potential needs of aged parents and their younger generation. At a point when there is still time for financial action other hurdles impede action taking. Longer term investment decisions require a greater level of financial competence and confidence and the ability to find trusted advice. For many individuals finding trusted advice presents a problem as there is a lack of faith in ‘the system’, pensions and investment performance and advice. The regular media stories of ‘miss selling’ and ‘pension scandals’ only add fuel to the unease. Added to this unease is the worry about frequent changes to the state pension and benefits system and whether it will be worthwhile to save for retirement.

It is not difficult to see why some choose immediate consumption rather than the development and execution of a long term plan. However the penalty for failing to execute a long term plan is likely to be reduced choice of when to leave full time work and fewer options over quality of life issues. The Pensions Commission concluded that if we are to have a comfortable retirement we must save more or work longer. A failure to save adequately will mean that people will have no choice but to work longer to achieve the quality of life that they seek in their retirement. But, if we are to work longer, we must be employable and that means life long learning and keeping our skills and health up to scratch. The choice is yours!

Stuart Royston is chief executive of Life Academy, the educational charity that believes financial literacy is an integral part of life planning.

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