Longevity and a decade of historically low interest rates are proving a dangerous cocktail for the over-50s generation according to new joint research by The London Institute of Banking & Finance and Seven Investment Management (7IM).
The findings raise a series of warning flags for policymakers as they show a generation approaching retirement dangerously unprepared, with little understanding of the pressures their assets might come under for funding both the essentials and their aspirations in later life.
The results are from a detailed survey of 2,000 over-50s with at least £50,000 in assets (including their home and pension savings). This cohort is less likely to be able to access benefits and more likely to have to rely on their own resources. The average value of assets among this cohort, including property, pensions, investments and cash, was £523,857.
When planning for retirement and later life, most don’t take financial advice and have not even begun to think about preparing for later life care. The value of property isn’t currently being factored in despite accounting for more than half their assets, which may reflect a desire to leave an inheritance and/or help out younger generations.
The research found that while older Britons are good at counting the pennies, their caution means many have missed out on one of the longest bull markets in history. Instead, they have watched their savings languish in cash accounts generating returns from record low interest rates that have often failed to keep up with inflation.
The result is that many do not have the savings in place to retire comfortably, are under-prepared for the financial challenges they may face in later life and are unrealistic about how far their savings will stretch.
The findings
Poorly prepared for retirement and later life care
- Only half (50%) of those not yet retired feel well prepared for the day they stop work and 35% worry about how they will manage financially in retirement.
- Almost two in five (38%) admit they are going to have to work longer than they had planned and nearly half (47%) say they know they need to save more for retirement.
- Despite property values accounting for more than half of total assets in this group, less than one in ten planning for later life are currently considering either downsizing (5%) or releasing equity (8%).
- Only 8% say they have plans in place to pay for later life care (even though 73% see preparing financially for later life as an important objective and 72% realise that they will have to pay for it themselves).
- Only 20% of those approaching retirement age (50-59) have taken financial advice.
- 22% still do not have a Will despite most planning to have one.
Family focused
- Despite their personal needs nearly half (43%) think it is important to help children and grandchildren out financially. On average, those in their 60s are spending £1,294 a year supporting children and grandchildren with education, transport and housing costs.
- 43% think that helping their children and grandchildren is an important longer term financial objective and 47% are keen to leave an inheritance.
Not getting financial advice
- Many (77%) are not currently taking financial advice (56% have never had advice); 35% say they would never consider getting advice. However, of those who did, over two in five (42%) put a financial plan in place for the first time as a result of going to a financial adviser.
- Meanwhile one in five (19%) say they don’t have the financial expertise needed to invest assets on their own, with 44% of those admitting that they don’t have enough knowledge to make the best decisions and 41% responding that they don’t feel confident enough to make decisions without seeking advice.
Cash conscious
- 93% state that they know how much is in their bank account at any one time
- They do not overspend (only 8% say they spend more each month than they take in and only 9% are ‘not in control’ of their finances) and almost three quarters will not spend money without thinking it through (72%).
Cautious investors
- They are comfortable investing in cash ISAs (83%) and NS&I savings accounts (74%) but much less so investment trusts or funds (39%) or stocks and shares (40%).
- However, they are cautious investors – the priority for 42% when investing is to minimise losses – and two thirds have not changed their view of risk over the last year.
Time for a reality check?
Alex Fraser, CEO of The London Institute of Banking & Finance says: “What comes through loudly and clearly from these initial findings is that this is a prudent, waste-not-want-not generation but too many are unprepared for the reality of a retirement that can now stretch out for decades. They dream of a long happy retirement that ends with them passing on a nice inheritance to their children but the reality for many could be painfully different. For many, their properties are the main thing that stands between them and hardship in their later years, but downsizing or equity release isn’t yet on the radar.”
He added: “This generation is often considered lucky – many were able to buy affordable homes and many still have final salary pension schemes, even if they’re quite modest. But perhaps they’ve been lulled by that into a false sense of security. A failure to take a more holistic view of their assets and seek advice means that many risk plunging head first into a gap between reality and their expectations.”
Justin Urquhart Stewart, Co-founder and Head of Corporate Development, 7IM, said: “This generation has been badly let down by a perceived absence of affordable financial advice and a lack of financial education. Many people have been cautiously squirreling their money away into cash savings products at the time when they could have been thinking about investment risk and the power of compounding returns.
“Whilst investment risk might not be for everyone, and we all know that stellar stock markets gains can easily be reversed, too much caution can actually cost as inflation has outstripped cash returns – something many people are worrying about themselves. Longevity means they need their retirement savings to stretch further than any generation before them – over 20 years for today’s 65-year-olds, on average. The findings show that the financial situation for a large number of over-50s is far more precarious than was previously recognised.”
Last year, a 7IM discussion paper, ‘Challenging Traditional Attitudes towards Risk and Retirement’, showed how reducing risk in the approach to retirement could undermine investor outcomes. Co-author Matthew Yeates, Investment Manager, 7IM said:
“At the point when you are nearing your retirement your investment pot is often the largest it will ever be. This is when the effect of taking investment risk and aiming to compound investment returns can be its most powerful. However, what people discuss less is the fact it is also the point when inflation could be doing the most damage to your savings.
“With bank rates more than two percent below current inflation, losing that much per year on a large portfolio size can mean you are literally pouring your retirement savings away, just when your pot looked at its most healthy. Unfortunately, too many investors are de-risking their investment portfolios at this point when they should be looking to protect their hard saved cash against the force of inflation. An investor’s time horizon is often used to temper their investment risk. With life expectancy on the up many of them will be invested for much longer then they may have planned and so the point of retirement is NOT the point to stop investing for growth.”
Justin Urquhart Stewart added: “There are a number of lessons from this research. Society is going to have to prepare for many older people working long beyond the traditional retirement age (if part time). We need a credible plan from the government about how later life care will be funded because those that will need it next have no planned way of paying for it. And, finally, we need to prepare subsequent generations better to enable them to save adequately and invest wisely for retirement.”
About the research approach
Opinium surveyed 2,000 UK adults aged over 50, with assets of more than £50,000 (including property and pensions).
Participants were recruited via a random sampling method to help avoid selection bias, which was developed in conjunction with the London School of Economics. It takes into account various demographic variables (such as age, gender and region) to ensure that we have a representative sample of each demographic group in any sample we recruit.
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