This edition of the Financial Capability Week‘s guest blog showcasing the great work that organisations are doing to improve the low levels of financial capability across the UK from Nutmeg, the UK’s first online discretionary investment management company.
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Financial capability matters more than it has for decades. To understand why, you need to understand a little about what’s changed. In particular, what’s changed about the way we save for the future, and especially for retirement?
We aren’t saving the way we used to do.
Think about the ‘traditional’ model of lifetime saving. There were three parts to it. For many people, long-term saving started with a house. Second came a company or public sector pension, many of which were ‘defined benefit’ pensions, which paid out a guaranteed amount every year after retirement. This was backed up by a state pension. Third, people saved in cash and got a decent interest rate from the bank.
Together, these three things set you up for life. A house, a defined benefit pension, and cash savings. Now all are under threat.
Start with housing. Today, according to Nationwide, the average house price is nearly six times the average UK salary. Back in 1995, a house was twice as affordable, at only three times the average salary. Today the average house price is £206,000; back in 2002, it was half that figure. In 1988 it was below £50,000, in 1978 below £15,000.
So today, fewer and fewer people can afford this important asset, and this important way to save. And for those who can afford a house, with such large sums at stake, the process of securing a long-term mortgage can be complicated and nerve-wracking.
Good pension schemes are also harder to come by. According to the Pension Protection Fund, just 13% of defined benefit pension schemes are now open to new members and new contributions, compared to 43% in 2006.
Today the overwhelming majority of new pension savers can only save through a ‘defined contribution’ pension – a pot of money invested in the stock market, to which an employer and employee can both contribute. It’s your responsibility to minimise your pension fees, and make sure it’s invested appropriately. Meanwhile, the state pension provides only a very basic income.
Finally, cash savings aren’t delivering a return. Today, interest rates are at 0.25%, and many bank accounts offer far less. Go back to just 2006, and interest rates were above 5% – twenty times what they are today. And throughout many of the post-war decades, rates were closer to 10% than to five, let alone zero.
Today, with cash interest rates at next to nothing, many savers are investing to secure a reliable return. Many people find the task intimidating. Half of Nutmeg’s customers are first-time investors, and helping them work out what level of risk is appropriate for them is a vital part of our role.
So, across the UK, the way we save is changing. We are expected to take on far more responsibility for our own long-term savings, and to take on more personal risk. Many people feel unprepared for this. Tasks such as moving money from cash savings into the stock market or taking on hundreds of thousands of pounds in mortgage debt are naturally intimidating to many people across the UK.
All of these tasks depend on us, as individuals, making good decisions. And to do that, we need to be informed, smart financial consumers. This is why financial capability matters.
For more information on Nutmeg, visit them at www.nutmeg.com.