31 January 2023

Britain must once again make a virtue of saving

By Daniel Harrison

In the current economic climate, it is hard to keep an eye focused on the longer term; when today is difficult tomorrow might never come.

With the value of our take-home pay being eroded by double digit inflation and tax hikes, it’s also difficult to talk about putting away any money – let alone enough money – to secure our financial futures.

But we must talk about these things, especially given the recent wave of news from Westminster impacting our collective ability to save and plan for a retirement.

In case you missed it, Pensions Minister Laura Trott this week confirmed that the Government would not be increasing the pension contributions for the millions of workers automatically enrolled in workplace pensions; the rate will stay at 8%, despite most pension providers agreeing that a contribution rate of at least 12% is required for a comfortable retirement. The Government also declined to put a timeline on legislation lowering the age limit for auto-enrolment down to 18.

What’s more, the Government is also rumoured to be advancing the deadline to raise the state pension age to 68, with the change potentially coming as soon as the next decade.

And while this might seem like plenty of time for future retirees to adapt, in reality it is a blow for a country that is already not saving enough; instead of limiting our ability to save, the Government should be making savings easier.

A good start would be improving our financial literacy; too many of us graduate from school numerate but illiterate when it comes to the basics of saving or investing, including understanding the basic value of pensions or the miracle of compounding interest. Done right, Rishi Sunak’s maths reforms could help to remedy this deficiency.

Other moves to address the advice gap would also be welcome. The advice industry has not yet adjusted to the fee structures imposed by the Government in the Retail Redistribution Review of 2012, changes that made it harder for a new generation of financial advisers to enter the market. The average age of a financial adviser in this country is now 61 and the pool is only going to continue getting smaller.

As a result, too many Britons lack access to advice and think investing isn’t for them, even when more technology is now available to help guide them.

The biggest shift, however, will be cultural; Britain must once again become a nation of savers, not the nation of spenders it is today.

Deferring gratification isn’t easy, especially when daily life isn’t offering up very many pleasures, but more financial discipline earlier in our lives will give us more freedom as we approach retirement.

The proliferation of products such as ‘Buy Now, Pay Later’, which encourage irresponsible consumption accentuates this cultural problem. What’s more, regulation is often too slow to catch up with these products, as seen previously with payday loan schemes. Effective regulation of the financial services industry is a careful balancing act, but at the moment the scales are clearly tipped away from the long term interest of the consumer.

The stakes are high. If people don’t have sufficient pension savings, it means 20-plus years of personal hardship. Yes, things are tough now, but they’ll be much tougher for longer later if we duck hard decisions.

Culture change is hard. But  we can get started with a combination of government action to encourage people to stand firm with their pension savings, as well as balanced regulation from the FCA to ensure financial advisers can help plug the advice gap. It’s time to think long term and ensure the next generation can build for a financially sustainable future.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

is the CEO of True Potential.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.