Gordon Reid, Learning & Development Manager here at LIBF, explains why all of us can benefit from financial advice and sooner rather than later
Many of us don’t want to think too hard about financial realities. In particular, the real costs of retirement tend not to be front of mind. For example, when Carl Fox, the voice of reason in the film “Wall Street”, says "Money's only something you need in case you don't die tomorrow”, there is no discussion of how many tomorrows most of us can expect to see.
Part of the reason for our collective avoidance of pension planning - and 30% to 40% of people in private sector employment won’t have a large enough pension in retirement – is that the accumulation phase of pension saving can look reassuringly long. It’s tempting to think that we will always have time to get round to saving. Besides, what difference can it really make if that is delayed by a few years to pay for a holiday, a car, a kitchen extension…? The decumulation phase, we may be equally tempted to think, will in any case be much shorter and much cheaper. But life expectancy in the UK after retirement is 20 to 30 years for many people and a life of leisure is not necessarily cheaper than one filled with work.
That sort of approach to financial planning is why almost all of us can benefit from talking to a financial adviser…Here are some of the facts:
We are living longer
The proportion of people aged 65 and over is expected to increase from just over 19% today to around 23% by 2045, according to ONS projections. The number of people aged over 85 is projected to reach 2.8 million by 2040 and 3.6 million by 2050 – representing nearly 5% of the total population and double the almost 1.8 million aged 85 plus today (based on ILC analysis of ONS national population projections).
But many of us are sicker and working less
A closer look at healthy life expectancy across the UK reveals stark differences between local areas. In some parts of the country, people can expect to spend over a third of their late life in poor health, with significant implications for labour market participation, as well as health and care demands. Similarly, disparities in how long people remain in the workforce are linked not just to age, but to local health, income and support structures.
We spend an average of just 31 years in work between the ages of 15 to 65, which has reduced by 6 months since the COVID-19 pandemic (between 2019 and 2022), according to the ILC Healthy Ageing and Prevention Index. To qualify for a full State Pension, individuals will usually need 35 qualifying years of National Insurance contributions.
In the 1970s, approximately 42% of our lives was spent in economic activity but, despite the continual rise in the proportion of women in paid employment, half a century later this had fallen to 38.5%. And fewer of us can rely on family for support. More people are ageing without children – the number of people aged over 65 who don’t have adult children is set to rise from 1.2 million in 2012 to 2 million by 2030. This means more of us will be increasingly reliant on formal, and more expensive, care.
But we don’t know how much we need to save
In a 2024 survey carried out by Which?, 51% of people yet to retire said they weren't “confident how much money they'll need to deliver a comfortable retirement”. Helpfully the PLSA and Loughborough University have developed the Retirement Living Standards, to help us to picture what a comfortable retirement might look like.
Older generations are better off than younger generations
Current older cohorts have benefitted disproportionately from the increase in wealth since the global financial crisis. The median total wealth for someone aged 65 to 69 in 2019-20 increased by 46%, or £112,597, between 2010-11 and 2019-20. In contrast, the median wealth of someone in their late thirties at that time increased by only 9%, or £6,751, over the same period.
Increases in wealth are being driven, in large part, by increases in property and pension wealth.
Change in median housing wealth by age between 2010-11 and 2019-20
Source: Wealth and Assets Survey Wave 3 and Round 7. Real value, adjusted using ONS CPIH Index (base year 2015). Median wealth. Weighted estimates.
Change in median pension wealth by age between 2010-11 and 2019-20
Source: Wealth and Assets Survey Wave 3 and Round 7. Real value adjusted using ONS CPIH Index (base year 2015). Median wealth. Weighted estimates.
Shift from defined benefit to defined contribution pensions
In 2023, there were 14 million active members in DC workplace pension schemes, compared with only 736,500 active savers in private DB schemes. This trend is predicted to continue, as only 6% of private sector DB schemes are still open to new members. The median DB pension pot, according to ONS figures for 2022, is worth £66,100, around four times the value of the median DC pension pot, at £17,000.
This shift from DB to DC pension schemes means that individuals will bear more of the risk of saving for their retirement, as well as more of the risk during decumulation given the choices they will face.
Taking risks
We know that people value certainty: the majority of individuals prefer to take less risk, even if this means lower returns. As evidenced below, appetite for risk decreases with age.
Individual preference over risk and return.
Which of the following statements best applies to you? I would rather see a high return on my savings and investments, even if this means taking more risks; or I would rather take less risks with my savings and investments, even if this means lower returns.
Source: ILC and M&G commissioned YouGov survey of 2,054 adults. Fieldwork undertaken 15 – 16 May 2024. Respondents also had the option to answer ‘neither’ (results not reported here).
The impact of automatic enrolment
While automatic enrolment (AE) has been a clear success in boosting individual saving for retirement, with 20.8 million eligible employees (88%) saving in a workplace pension in 2023, according to GOV.UK, evidence suggests that many people are still not saving enough. Current AE default contribution rates are too low for most people to secure a comfortable standard of living in retirement.
Source: DWP estimates derived from the ONS ASHE, GB, 2023
People on lower incomes are at a particular disadvantage, as are women, people with disabilities, carers, minority groups, and people with atypical working patterns. The current system also ignores the range of reasons why people need to save: not just for retirement, but also to meet unexpected financial shocks, to invest in housing or education, or simply for a rainy-day fund.
A piece of mind for peace of mind
With more pension choice than ever before, access to useful, accessible and affordable financial information and advice will be crucial. However, the FCA’s Financial Lives Survey shows that only 8.3% of adults reported receiving regulated financial advice in the year to May 2022. “Some form of support” about investments, saving into a pension or retirement planning, was received by 29% of adults in that year. Cost is a key barrier to accessing financial information and advice, but the growth of AI is now opening up opportunities to provide personalised, accessible and affordable support to more people.
In 2019, the ILC quantified the value of taking financial advice for people’s overall financial outcomes. The research found that receiving professional financial advice between 2001 and 2006 resulted in a total boost to wealth (in pensions and financial assets) of £47,706 in 2014/16. In addition, the benefits of financial advice were potentially greater for those we term “just getting by” than for those we consider “affluent”: the former would have seen a 24% boost to their pension wealth compared to 11% for more affluent groups (those most likely to be advised).
The ILC also had a look at the non-financial value of advice finding that:
People who take advice are more confident and better prepared.
Advice improves financial literacy, confidence, and delivers greater control, reassurance and peace of mind.
Men and women see the non-financial benefits of advice differently and sector should take a more targeted approach to communicating the benefits of advice.
In conclusion
In a time where so much responsibility is put on us as individuals to plan for an uncertain future, financial advice has never been more important.
It’s much too easy to put off financial planning, and even more so when we’re overwhelmed with the day-to-day, we’re worried whether we will make do today, or we simply don’t know where to start. So having someone who can guide us along the way and can point us in the right direction is crucial. It’s not just about maximising retirement income, but about making a plan, feeling in control and having peace of mind.
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