Nearly two million younger people could have an extra £7,000 a year in retirement income, simply through a series of small behavioural nudges, according to a new Scottish Widows study.
Getting young people to picture their ‘future self’ and introducing simpler pension labels to link contribution levels and retirement income, were just two small changes that were shown to boost future retirement savings by up to £142,450 amongst those under the age of 30.
The study included psychological testing by the Behavioural Insights Team (BIT) with around 3,000 22-29-year-olds across the UK to learn more about their attitudes, confidence and expectations around their future finances.
Adam Benskin, CEO at independent financial advisory firm, Strabens Hall says: “Young people often don’t realise how much capital may be needed to provide themselves with a comfortable retirement, and the amount they need to save on a monthly basis. The key to making themselves better off is to start saving as early as possible. Even if they are only saving a small amount initially, this could make a big difference to their retirement income due to the compounding effect of investment returns.”
Pete Glancy, head of policy at Scottish Widows, said: “Young people are faced with a unique set of challenges when it comes to saving for retirement. One of these is perception. They can often think of their ‘future self’ as a different person and so may prefer holding on to their income for more immediate priorities, like a first home deposit, rather than saving for someone they perceive as a stranger. That’s why we previously created an ‘Age Me’ app, so people could look their older, future self in the eye.”
Persistent problems of pessimism and disengagement
Research carried out alongside the experiments found young people were relatively pessimistic about their retirement. Nearly 90% stated they were either not at all confident, a little confident, or moderately confident they were doing enough for their retirement.
Most people wanted to retire by 64 at the latest (63%) but expected it to be much later. In fact, over one in five (21.9%) expect to either retire after 70, or never actually stop working.
The main barriers to saving were having no spare money after paying their bills, the need to save for a major expense such as a house deposit or paying off debts. However, beyond these ‘financial constraints’ the two most common answers were simply they hadn’t thought about retirement or savings (21%) and didn’t know how to increase their contributions (15%).
Before Covid-19 hit, nearly half (49%) of 22-29-year-olds were not saving adequately for retirement meaning they face working for far longer than they expect to or retiring with only enough money to cover the basics.
This situation has only intensified with mass unemployment looming and more than a quarter (26%) of 18-24-years-olds having already lost their job or been furloughed. Sectors and jobs that young people disproportionately work in, such as hospitality and retail, part-time and zero hours, have also been the most affected.