British consumers have changed their minds about saving, paying debt, and investing in pensions.
The Great British Retirement Survey found 49 per cent of consumers considered they were free of financial worries, while 29 per cent prioritised travel over work.
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The annual report by the website Interactive Investor seeks to explain how people manage their money and prepare for retirement.
This picture has changed dramatically in 2022, with the cost-of-living crisis making saving less attractive. The updated results found that 59 per cent of people are very worried about living expenses, and 73 per cent stated that stress affects their mental welfare.
Over half of people aged 66 or under have restricted savings, while 20 per cent have stopped saving altogether, further exaggerated in 22 to 34 years olds, where 64 per cent say they have no money to save.
Almost the same proportion of those on higher incomes feel the squeeze, with 54 per cent of respondents earning £60,000 or above reducing their savings contributions.
Living Costs v Saving
The cost-of-living crisis has been generating a little headline fatigue, but it is a tangible phenomenon that is becoming hard to ignore.
With a fifth of people stopping saving and a larger proportion in younger age groups, the impact is felt across pension and investment sectors.
Rising living costs are the biggest driver, whether because people are concerned about the future, want to keep their financial cushion easily accessible, or do not have the income necessary to allow for regular savings.
Around 63 per cent of those surveyed by NerdWallet in a comparable research study perceive it as a short-term solution and intend to resume paying into pensions, investment funds or savings accounts in the next six months, and 14 per cent in nine to 12 months.
Tracking The Rise In Living Costs
ONS figures show that consumer price inflation in September 2022 was at 10.1 per cent against the previous year, compared to 9.9 per cent in August, reflecting a 40-year high.
The Bank of England announced another base rate increase to 3.0 per cent on November 3, 2022, and has speculated that inflation could reach as high as 11 per cent, against a government target of two per cent.
Around 91 per cent of UK adults have said that their living costs are higher than a year ago, with 44 per cent finding it difficult to keep up with energy payments.
Multiple contributing factors have caused food, fuel, and commodities to spike in cost simultaneously:
- Russia’s invasion of Ukraine has caused mass shortages and disruption to supply chains, with wheat from both countries accounting for 30 per cent of all international exports.
- The post-pandemic global economy has been in poor shape, with billions of pounds in deficits due to business closures, logistics disruption and, in the UK, furlough schemes.
- During 2020/21, unusually cold weather caused energy demands in Asia to peak, which impacted wholesale energy prices even before the Russian invasion exacerbated the issue.
- Over 30 British energy supplies have folded since the start of 2021, with those costs added indirectly to customer bills.
- Supply chains have been affected by shortages of fuel and drivers. Worldwide logistics costs have also increased significantly, with the cost of shipping one container from the Far East to the UK growing from £3,000 to £15,000 over the last two years.
- Raw material prices used in countless commodity manufacturing processes have also risen, with complex transport and distribution challenges.
While some of these reasons may feel distant from everyday British life, the result is a multi-factored impact on general prices for utilities, food, petrol, and other items.
The Possible Impacts Of Reduced Savings
Over the immediate future, many households may hesitate to pay anything into savings even if they have the income to do so.
Suppose wages do not begin to keep a better pace with inflation, and interest rates continue to climb higher. In that case, there is a natural nervousness about putting money into higher-yield savings accounts where savers need to give notice to withdraw.
The same applies to pensions, where it may be difficult to justify putting savings into an inaccessible pension fund in an emergency.
However, the outcome is that an increasing proportion of the population is considering retirement without any wealth or will have no financial cushion to cope with unexpected costs – or further increases in average living costs.
Pension savings
Reducing pension payments could mean millions of people have a shortage in their retirement savings, with 22 per cent unsure of their financial future and 10 per cent uncertain whether they will ever be able to retire.
The current State Pension is set at up to £185.15 per week, and with the triple lock in a precarious position, there is no assurance that this will continue to rise each year with the higher of wage growth, inflation or 2.5 per cent.
It is not only the value of pension benefits but other aspects, such as employer contributions and tax relief, that will affect those who stop or reduce their pension savings.
Taking a 12-month pension break now at age 25 would mean a young adult on a £29,000 salary would be £4,600 worse off when they reach the State Pension age.
The best option is to work on a retirement plan, so you know how much you need and can calculate whether you have a shortfall to make up – if you are on or above target, you may be able to take a short break without any serious repercussions.
Cash savings
Stopping regular savings deposits or limiting the amount paid into a savings account seems an obvious way to cope with living costs or income shortfalls. Still, it could mean a lack of security.
Most experts recommend having at least three to six months’ worth of income saved as a contingency for unexpected outgoings, such as needing to repair a boiler or replace a car.
Although savings may not be as important as paying your mortgage or rent, the risk is also that you may lose out on wealth accumulation through compound interest.
Investments
Investment products vary considerably in terms of loss exposure; profits earned, maturity dates and asset classes. Still, lower-risk options such as an ISA can act as a medium or possibly long-term investment, which benefits from compound interest.
There is the potential to lose money on an investment and the need to wait if you wish to withdraw your money from an investment product.
However, if you have a well-balanced investment portfolio and are reliant on this to finance your retirement or supplement your income, cashing out now could be a short-term reaction with long-term outcomes.
A Fifth Of Brits Have Stopped Saving FAQ
What savings does the average person have in the UK?
Survey data and statistics vary, but around nine per cent of British people have no savings to speak of, and 40 per cent have insufficient savings to support themselves for one month without any additional income.
MoneyFarm reports that average savings based on age are as follows.
- Under 25: £2,481
- 25 to 35: £3,544
- 35 to 44: £5,995
- 45 to 54: £11,013
- Above 55: £20,028
How much of their income do most people in the UK save?
The average person saves roughly 8.21 per cent of their annual income.
Low-income families tend to have around £95 in annual savings, whereas those on high incomes can deposit £6,289 into a savings account.
In 2020 the average amount in a savings account was £6,757, with half of all British households saving under £180 a month.
What should I have in savings by age 60?
The amount you aspire to save will depend somewhat on your pension arrangements and how far your pension benefits will cover your living costs.
As a rule of thumb, you should aim to have around 20 to 25 times your annual spending to retire comfortably and live a relaxed lifestyle of the same quality as when you were working.
Spending £30,000 a year means needing a pot of £600,000 to £750,000 to retire but never needing to work again or cut expenses.
However, you may be able to reduce that target if your pension funds, investments, or other savings contribute towards your retirement pot.
Why have so many people stopped saving?
The primary issue is that wages have risen slower than inflation, so paying bills, buying groceries, and travelling to school or work are costing a more significant proportion of the average income than before.
That means many people no longer have the expendable income to deposit into a savings account or rely on savings to cover additional expenses.
Is investing better than saving?
The right strategy will vary, depending on your age, intended retirement, the current capital and attitude to risk. For example, investing can provide greater returns than a savings account – but equally comes with the risk of losing wealth since profits are not guaranteed.
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