Low risk tolerance, poor financial literacy, and economic gloominess derailing Britons’ long-term financial resilience, abrdn finds, as it launches Savings Ladder Index
- 23 million people (two-fifths of all UK adults) have poor financial literacy, according to the first ever on-going barometer of UK adult financial literacy
- People with good financial literacy have £20,000 more on average in their pension and are more likely to have a pension in the first place
- The first iteration of abrdn’s proprietary ‘Savings Ladder index’ found that Britons have a low propensity to save and invest – hampering long-term financial resilience.
- Less than a fifth (17%) of adults are confident about the future performance of the UK stock market and 16% are confident about the UK economy. The majority of Britons (55%) have a low appetite for investment risk
- The top 5% of people by investment wealth hold almost half (47%) of the total value of UK investments.
- abrdn is calling on any future Government to act urgently to encourage a ‘Savings Ladder’ culture in the UK – a movement to encourage investing and share ownership.
The findings come from the global investment company’s new ‘abrdn Savings Ladder Index’. The index will track levels of and approaches towards savings and investments over time among the public. It will also measure how likely people are to start saving and investing more via a ‘Propensity to Save and Invest’ score.
Crucially, the index will also regularly gauge UK adult financial literacy for the first time, to abrdn’s knowledge, which abrdn believes is vital if financial education is to be funded at scale by the Government. The OECD collates and publishes data on adult financial literacy levels across 39 countries, and it is striking that the UK does not take part.
With permission from the Global Financial Literacy Excellence Centre, abrdn asked its ‘Big 3’ financial literacy questions*, which are used as an international standard for comparison. The research suggests that 44% of UK adults have poor financial literacy, extrapolating to 23.3 million UK adults.
The abrdn Savings Ladder Index was conducted by Opinium Research amongst a nationally representative sample of 3,000 UK adults. The index found that UK adults have:
- An average Propensity to Save score of 53/100
Measures understanding of savings products, likelihood to increase savings in the next six months, likelihood to take out new cash savings products in next six months, and confidence in taking out and managing savings products.
- An average Propensity to Invest score of 37/100
Measures understanding of investment product, likelihood to increase investing in the next six months, likelihood to take out new investment products in the next six months, confidence in taking out and managing investment products, how much of a priority long-term investing is, enjoyment of reading about investments, risk tolerance.
- An average Economic Outlook score of 46/100
Measures confidence in the UK economy, confidence in the UK stock market, and how confident they are about their personal financial situation.
- An overall “Propensity to Save and Invest” score of 45/100.
This was calculated by combining people’s Propensity to Save, their Propensity to Invest and their Economic Outlook.
Respondents with a strong propensity to save and invest were allocated a score of 100/100. At the other end of the scale, where responses were seen as unlikely to save and invest, respondents were allocated a score of 0/100. The economic outlook pillar also gave a 100/100 for a positive outlook, and 0/100 for negative.
abrdn’s Savings Ladder manifesto was launched earlier this year, highlighting the nation’s on-going enthusiasm for home ownership. In it, abrdn proposed that building a similar momentum behind saving and investing could transform our future financial health. Looking ahead, the company will be measuring people’s propensity to save and invest every six months.
Sarah Moody, Chief Corporate Affairs and Sustainability Officer, abrdn, says: “For decades, people in the UK have been encouraged to place property at the centre of their financial lives. If we are to avoid a looming retirement crisis, we now need to generate the same momentum behind saving and investing.
Any future government should be urgently considering policy interventions – including the doubling of minimum pension contributions and scrapping stamp duty on UK shares and investment trusts – to kickstart the change in habits that the country will need in the years ahead.
Better financial education is also vital if we are to encourage a culture of investing for the long-term, with our research suggesting that poor financial literacy is hampering people’s long-term financial health.”
The cost of a financial education
A fifth of UK adults (20%) were unable to correctly answer any of the “Big 3” financial literacy questions asked of them[1]. A quarter (24%) only answered one question correctly. We consider these groups (44% – equating to 23.3 million UK adults) as having poor financial literacy.
Those with poor financial literacy are less likely to have pensions and hold less in them when they do -although there are likely several related factors, including low pay and socio-economic background, contributing to this.
The gap in pension holdings between those with poor and good financial literacy stands at 18% (or £20,000) – illustrating how crucial financial education can be for long term financial resilience.
Those with high financial literacy scores are almost twice as likely to hold investments as those with poor financial literacy scores (39% vs 21%).
Just 20% of people say they have a good (i.e. advanced or expert) understanding of savings products and even fewer (12%) have a good understanding of investments.
Property ladder
The abrdn research found that UK wealth is skewed strongly towards property over pensions. The index found that average person who owns a home, it is worth roughly 6.7 times more than the value of their pension (£250,000 vs £37,500) – excluding those with defined benefit (DB) pensions.
Even those with high incomes (£60,000+) have only saved 27% of their property value into their pensions (£175k vs £650k).
Almost half (44%) of people think property is the best long-term investment for their savings, despite the benefits from pensions and investments of tax efficiency and compound interest. Less than one-fifth (17%) of people chose pensions and more than a quarter (28%) didn’t know.
Risk aversion and gloomy outlook on economy
The majority of UK adults (55%) have a “low risk tolerance” when it comes to investing, which would see them holding their savings mostly in cash or bonds. Risk aversion is high across age groups – 40% of 18–34-year-olds define themselves as having a low appetite for risk, as do 53% of those aged 35-54 and 66% of the over-55s.
Those with the lowest financial literacy levels (scoring ‘very poor’) were around double as likely to have a low risk tolerance than those with the highest (scoring ‘very good’) – 62% vs 34%. Similarly, those with the highest financial literacy were double as likely to have a high risk tolerance (10% vs 4%).
The research also found an extremely gloomy outlook. Less than a fifth (17%) of UK adults are confident about the future UK stock market and 16% are confident about the UK economy on a short-term view, based on the current situation – contributing to people’s low propensity to save and invest.
Even so, on a longer-term view, when asked where they would invest £1,000 if they were wanting to grow it for the long-term, people’s top choice was in UK stocks and funds. More than a third of people chose the UK (35%) followed by the US (16%) and Europe (11%).
The investing gap
The data shows that the top 5% of investors (by total investment wealth) hold almost half (47%) of the overall value of UK investments, while the bottom 51% hold 7%.
While no amount of financial education or policy support can solve such deep-rooted inequalities, abrdn believes there are learnings to be had on how that gap changes over time and its demographic differences.
Demographic differences
The Savings Ladder Index revealed significant demographic and regional variations in how likely people are to increase their savings and investments.
- Men had much higher index scores than women, consistently across all three pillars. The average Propensity to Save and Invest score was 51 for men, compared with 41 for women.
- Age made little difference to overall scores, but young people typically have a higher propensity to invest (45 for 18-to-34-year-olds compared with 32 for the over-55s).
- Individuals living in London had higher average index scores (51), while people in Wales (43), Northern Ireland (44), Yorkshire and Humberside (43), and the South West (44) scored the lowest. Scotland also scored lower – at 45.
- The self-employed scored lower on average (45 vs 48 for employees) – which is concerning given these individuals do not benefit from auto-enrolment.
In its Savings Ladder Manifesto, abrdn made several policy recommendations for how to address the savings and investment crisis and encourage a “Savings Ladder” culture in the UK. They included:
- Simplifying the ISA system
- Scrapping stamp duty on UK shares and UK domiciled investment trusts
- Doubling minimum pension contributions to 16%
- Introducing a shake-up of financial education
Financial education
abrdn has called on Government to:
- Extend mandatory financial education to primary schools and Sixth Forms in England to ensure fewer young people miss out on a financial education.
- Integrate finance into relatable subjects, from maths, economics, citizenship and food tech. Scotland already integrate personal finance across the curriculum, and abrdn would like to see consistency across all four nations.
- Discuss a new GCSE and sixth form qualification that focuses on financial skills.
