If we put your ‘money management’ skills to the test and gave you marks out of ten, how well do you think you’d do?
How good are you with money? Although we learn maths at school, we don’t learn specific skills such as budgeting, tax, or pension planning. We’re released into the world and expected to pick it up as we go along.
Just how bad are we then?
A government study from a few years ago by the Office of National Statistics did some extensive research into our financial planning behaviour in the UK. It looked at six different aspects of financial capability, revealing what we as a population here in the UK are both good at, and bad at.
It might be a few years old, but things aren’t much better these days. Have a look at the results. And just to make you feel like you’re back at school, the results give us a mark out of 10.
Our best subjects?
- ‘Making ends meet’, with an average score across the population of 7
- Closely followed by ‘controlled spending’ and ‘organised money management’ – both at 6.7 out of 10
- And finally, ‘choosing products’, at 6.6
And the not so good?
Well, there are two remaining subjects in which we could apparently do much, much better!
- At ‘staying informed’ the average score is 3.2
- And ‘planning ahead’ it is just 2.3
So we’re not very good at planning then
We need to recognise and try to overcome our poor ability to manage money and make better decisions. In short, we need to plan better.
We need to consider how the decisions we make now will impact on our future selves. This means balancing our tendency to favour financial decisions that bring a quick reward, against shoring up a great financial future.
Some financial choices are more exciting than others
Our enthusiasm to get a mortgage is likely to be high, for example, because it’s a financial adventure that gives us an immediate benefit. We can buy the home of our dreams (or at the very least, a home to live in)! However, our enthusiasm for pensions is likely to be much lower. Because we don’t see the benefits until perhaps decades later.
People tend to prefer to spend money today, rather than save it for tomorrow. Pensions are designed to overcome this tendency not to think about their future selves. Current rules aim to make this easy by automatically enrolling employees into workplace pensions, quietly helping them build up a pot of money for later in life, unless they actively choose to opt out.
How can we approach pension planning with enthusiasm?!
Ultimately, some pension decisions do have to be made at the point people start to step back from work. There’s no point putting them off. Here’s some things to consider…
- The State Pension can be taken as soon as it’s available, or deferred to improve returns later. When is the best time for you?
- Private pensions come in a variety of different forms, offering different options and guarantees. What’s the best option for you?
- Retirement planning needs to be holistic, considering not just our own but any partner’s pensions too.
- And finally, you need to take into account cash savings, investments, State benefits, housing equity and tax, and inheritance planning.
Retirement is where our weakness in ‘planning ahead’ can start to cause serious problems. At this point we’re starting to rely on the assets we have built up to see us through, we’re usually limited in how much more we can save and therefore are less likely to be able to afford to make mistakes.
In addition, there is no ‘one size fits all’ solution.
What’s right for your friends or family is unlikely to work for you
We all have our own unique situation, requirements and situation. So it’s worth getting some decent advice on your own, individual plans.
Free advice from Pension Wise
Free and impartial guidance from Pension Wise is available to all over-50s needing to decide how to access pension pots. It’s a good way to start planning ahead but it only offers information, not specific advice.
This takes this up a level. It takes on board an individual’s own circumstances, including difficult topics such as how much risk they are prepared to take with investments. Or how much they could afford to lose. And then recommends a specific financial plan on how best to achieve their goals. Crucially, it also makes sure things are reviewed regularly to ensure the plan keeps working – not just at the point of giving up work, but throughout retirement.
Don’t put it off!
Planning ahead for retirement is just as important as planning your career or next job, getting married or having a family. But research shows that most of us aren’t very good at planning ahead for things we won’t feel the benefit of relatively quickly.
Planning is not something that improves much with age, either, although we do generally get better at coming to terms with our weaknesses. Perhaps the moral is that, if you’re only going to take professional financial advice once in your life, then retirement is the time to do it.