The Social Market Foundation (SMF) published the ‘Saving Better’ report in August to examine our money-saving habits in the UK. It took an unflinching look at how little we’re setting aside, finding that many people are woefully underprepared for their future.
The result of the SMF’s report suggests that investors need to put a greater trust in professional advice. Increasing scepticism following years of financial scandal have taken its toll. Perhaps now more than ever, investors should be actively seeking out Chartered practitioners. Chartered membership can be gained across a broad range of professions (e.g. accountants, engineers, insurance brokers) and stands for reliably high levels of learning and ethical behaviour.
I write often on this blog about building trust in our profession by applying the highest ethical and professional standards in our work and client relationships. I’m pleased to have achieved Chartered status as a financial planner. I'm also very proud that all the planners at First Wealth are Chartered, and indeed First Wealth is a Chartered company. The principles of the Chartered financial planner status are providing professional financial advice, upholding high ethical standards and building confidence and trust with investors.
The ‘Saving Better’ Report
Some of the key findings of the report are quite shocking (although not massively surprising) and two main points emerge. The first is that large chunks of the population simply aren’t saving enough money and some are not even saving anything at all. More than 14 million people of working age in the UK save nothing on a monthly, yearly or any sort of regular basis. Additionally, over 26 million adults don’t have enough tucked away for a rainy day (generally defined as three months’ worth of income), or any pension savings.
The second finding is that even when many households do save money, they are failing to make the most of it, or to make it work for them. The headline figure on this point is that UK savers are holding more than £200 billion in cash above and beyond the ‘rainy day’ level. This is money which, if invested, could have accumulated a far greater return than had it simply been held in cash. The SMF estimate that over the last five years UK savers have missed out on £94 billion (that's a massive number!) of investment returns that they would potentially have gathered had they invested this money in the FTSE 100. Approximately 6.8 million people hold more money in cash assets than they need to cover their rainy day fund and seven in ten people in Britain hold no medium to long-term assets (i.e. those that are less liquid than cash deposits or that come with a higher rate of return to reflect their increased risk, like shares, bonds or loans).
The report’s author, SMF researcher Matthew Oakley, sums up the problem:
“Despite the best attempts of policy makers, regulators and consumer groups, UK households do not save enough – and those who do save are losing out on billions of pounds in interest by keeping their money in cash. There are clear links between saving, wellbeing, living standards and economic growth and the UK’s poor saving performance is a major social policy concern.”
Investing Beats Saving
The problem the report diagnoses – people who don’t save anything or anywhere near enough – is the burying-the-head-in-the sand syndrome (aka the Ostrich Mentality). There are a variety of reasons why this might be the case.
First, and perhaps most obvious, is that many people simply don’t have the excess income to save each month. For many families, prices have risen faster than income since the financial crisis, and real decisions like feeding the family and heating the house are easily placed ahead of retirement provision.
Second, it can be easy to underestimate how much you will spend in retirement, thinking that you will wind down and have a less busy life, but often with more leisure time comes more holidays and more opportunities to spend. It’s also difficult for many people to project 20 or 30 years into the future and to empathise with their future selves. The demands of the present day always seem more pressing and they put the priorities of their financial future to the back of their minds, telling themselves that ‘it will work out somehow.’ But, without an adequate savings or retirement plan, they’re going to be facing a serious future financial shortfall.
The third problem can occur in uncertain political and economic times like those we’re living through at the moment, where there can be a tendency for investors to avoid what they see as a risk. They might be saving money, accumulating cash, but at the same time they’re reluctant to invest it. They’re afraid that there might be a stock market crash, or that they’ll lose money as a result of some economic or political upheaval. However, keeping all their savings in cash also represents a serious risk over the long term. The SMF report calculates that money left in instant access cash savings accounts over the last five years would have lost over 4% in value in real terms due to inflation. Compare this with the percentage that the money could have increased in value by if it had been invested in the FTSE 100 – 47% – and it’s clear to see how badly some investors are missing out.
Government policy has been gradually diminishing consumers' confidence. At best poor, and at worst scandalous, raids on pension dividends; the true ramifications of which are still working through the system now and continuous tinkering with pensions and the tax treatment of savings vehicles has impacted long-term saving. Personal Equity Plans (PEP), Single Company PEPs, Individual Savings Account (ISA), New Individual Savings Account (NISA), Lifetime Individual Savings Account (LISA) and the Junior Individual Savings Account (JISA) are a roll call of amendments on the savings market, that offer no real progressive thinking.
What can be done? Ultimately this hugely important question can only be solved with an unwavering commitment to education and training. Unfortunately, as we’ve seen time and time again, there is a fundamental conflict with the short term five-year political cycle and the long-term decision making required to increase knowledge and skills.
Increasing real disposable income (to facilitate savings) will only be achieved through increased productivity. The UK has some of the lowest productivity rates amongst the G7, as reported by the Office for National Statistics.
Perhaps it is time for the government to establish an independent, cross party Productively Board. The board would have a twenty-five year time horizon, and would consider vital areas such as infrastructure investment (for example, fibre broadband), and training (coaching, and entrepreneurial skills). The cross party nature of the board would allow them to make long-term investments, without the need for democratic approval at the next ballot box.
When making long-term investment decisions, businesses need peace of mind about future government policy. It’s exactly the same with individual financial decisions. The government needs to create a suite of long term savings plan that are attractive to savers. ISAs and pensions need to be simplified, offer savers compelling tax breaks to invest their money. The government then needs to then stick with those rules! The constant meddling and talk of future change undermines confidence and acts as a deterrent to saving.
The rest of the answer lies with education programmes. I’ve written before about the need for basic financial planning skill to be taught in school. Surely this is an incredibly important life skill to learn? This would help with issues like budgeting, savings for the future, and the benefits of long-term equity investment.
Confidence in a Robust Plan
Diversifying your investments and accepting a certain level of risk is vital in all economic climates, as much in the bad times as in the good. Of course, it can be difficult and sometimes seems counter-intuitive when the economic climate is so changeable. Financial planners play a vital role in educating clients and giving them the confidence to remain in the markets.
It’s important, not just for investors, but all of us as a society, to understand that the complexion of our own financial future is linked directly to the decisions we make today. The best way to ensure the financial future you want is by having a plan in place to get you there from the present day forward. We meet with our clients to assess all their financial needs. You need to understand what you actually spend today, and your prediction for future expenditure.
We use lifetime cashflow modelling (rehearsing the future) to assess our clients overall financial position, and give them an idea of how much capital they need to live comfortably for the rest of your life (your Number).
Then we build a plan which can adapt to their circumstances, and structure a portfolio which will help them create the financial lifestyle they want today while carrying them to where they want to be in future.
If you would like speak to a Chartered Financial Planner, please get in touch. Or if you'd like to start planning your financial future today, download our free lifestyle financial planning toolkit!