abrdn’s new Savings Ladder Index shows how poor financial literacy is hitting retirement saving
It’s the truth we all want to ignore: as a nation we are not saving enough. Widespread research shows the majority of Britons will not enjoy the standard of life they are used to in retirement because of insufficient pension savings.
Clearly, the UK urgently needs to establish a national culture of saving for later life so that everyone can enjoy a financially secure retirement.
One of the main stumbling blocks to greater savings is a lack of knowledge among Britons about why they should be saving, the range of products that they can invest in, and how these products can help them build a better financial future.
UK financial literacy is concerningly low
At abrdn, we’re keen to support an improvement in the nation’s financial literacy. That’s why we created the Savings Ladder Index, which includes the first ever continuing barometer of adult financial literacy in the UK.
With permission from the Global Financial Literacy Excellence Centre, we asked a representative sample of people the 'big three' financial literacy questions. These questions – which cover important financial concepts such as how inflation and interest rates work – are used as an international standard for comparison.
20% of UK adults were unable to correctly answer any of the three questions asked of them. 24% answered only one question correctly. This means that 44% of our respondents – equating to 23.3 million UK adults – would be classified as having poor financial literacy.
Having a low level of financial literacy such as that seen in the UK translates into real-life penalties, according to research. People who don’t understand finance are less likely to have pensions and hold less in them when they do. Just a third (33%) of people with poor financial literacy hold workplace defined-contribution (DC) pensions or private pensions/SIPPs, compared with just over half (51%) of people with good financial literacy. Their pots are also on average 18% smaller – £17,500 on median average, versus £37,500 for the more financially literate. This equates to a “pension penalty” of £20,000.
"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."
Sarah moody, abrdn's chief corporate affairs and sustainability officer
Regional and gender wealth gaps
The index also helped to identify the groups most at risk of falling behind on savings and investment. These include women, people with low financial literacy, and the self-employed. Women, for example, typically have lower index scores than men. This may help to explain the large average gap in size between men’s and women’s pensions.
There were also geographic differences. Individuals living in London had a higher average index score, while people in Wales, Northern Ireland, Yorkshire and Humberside, and the South West scored the lowest. Scotland also scored poorly, at 45. These differences are likely explained by the UK’s recognised regional wealth gap.
The self-employed are another potentially at-risk group. This is concerning, given that the self-employed do not benefit from auto-enrolment in workplace pensions.
Tracking the nation’s progress
Our first ever Savings Ladder Index has provided clear indications of where policymakers should focus their attention if they want to solve our long-term savings crisis. abrdn is pleased to be promoting improved financial literacy and will be producing regular updates on progress (or otherwise) in tackling the issue, as measured by our ongoing Savings Ladder Index.
Learn more about our index’s methodology and proposals to grow a savings and investing culture in the UK.