If my career in financial services was to end tomorrow, one of the learnings I would take away is the importance and benefits of developing a basic understanding of your own finances. Working in the industry obviously has benefits – and don’t get me wrong, I can by no means claim to be a personal finance expert – but I’m grateful to have a better grasp than many others from the ‘millennial’ generation.
Finance is something that affects everyone in one way or another over a lifetime, whether it’s managing your monthly budget, saving up for a house or holiday, investing your money for the longer term, insuring yourself against accidents or illness, or saving for a pension. This got me thinking about gaps in the financial knowledge of other young professionals working outside of the financial services bubble, especially when it comes to everyone’s ‘favourite’ topic – pensions.
The Cambridge dictionary defines a pension as ‘a sum of money paid regularly by the government or a private company to a person who does not work anymore because they are too old.’ At this, many young people would simply switch off, regarding it as a collection of words that mean very little at this stage in their lives. In fact, when I asked around my young professional friends of similar ‘millennial’ age, most knew they should be saving into some form of pension, yet the number who have actually started was worryingly low. Some even admitted that they simply ‘don’t understand’ what a pension is or how it works.
And these attitudes are reflected in a recent NOW: Pensions study that revealed only half (35%) of working Brits are currently contributing towards a pension and a further one in ten (15%) still believe the state will fund their retirement.
The actual time we’ll spend in retirement was also significantly underestimated. The average employee in Britain only expects to live until the ripe old age of 81 and spend only 16 years in retirement, yet latest figures from the Office of National Statistics indicate the average British male currently retiring at 65 is expected to live for 22 years – reaching the average age of 87. There is, therefore, a clear discrepancy between how long we think our money will have to last – and how long it will actually have to. And this is only going to get worse as life expectancy continues to increase.
It all boils down to lack of understanding and engagement, coupled with inertia and the misconception that pensions aren’t something you need to worry about until you approach your retirement years. This obviously couldn’t be further from the truth, and the flat rate state pension simply won’t be enough. We all need to start planning for the future early-on, sparing a thought on just how much you need to start saving now in order to live a comfortable retirement.
I believe the heart of the problem lies with lack of understanding rather than lack of interest, and not just about pensions but all aspects of finance that are likely to affect each and every one of us throughout our lifetime, whether choosing a bank account, purchasing travel insurance, or knowing the difference between an ISA, a mortgage and a pension.
Basic financial education is the key. It equips everyone with the knowledge, skills and confidence to manage their money effectively, so it’s easy to see why many have argued personal finance education ought to start in school.
The good news is that, from September 2014, personal finance education is set to become compulsory in schools across England for the first time, long-campaigned for by PFEG (The Personal Finance Education Group). Personal finance is already taught in schools in Wales, Scotland and Northern Ireland, so it really is about time England saw the benefits as well.
This landmark move signifies a time for change. Until now it has been far too easy to bury our heads in the sand, putting ‘pensions’ and other aspects of personal finance into a box earmarked for ‘later’. But there are still generations of people currently in work who won’t benefit from this education. We need to become more engaged and change our mindsets when it comes to financial matters, looking on it as an essential part of life, rather than something that we switch off from altogether.