Scottish Widows Savings and Investment Report Preparing for the Future: Britain s Savings and Investment Landscape

Transcription

1 Scottish Widows Savings and Investment Report 2012 Preparing for the Future: Britain s Savings and Investment Landscape

2 Contents Foreword 1 Part 1: Executive summary 2 Part 2: A challenging environment 3 Part 3: The national picture 5 a) The regional perspective 5 b) The short and long term 5 c) The drivers for long-term saving 7 Part 4: Barriers to saving 8 Part 5: Investments 9 Part 6: Financial support for family 11 Part 7: Conclusion and key challenges 12

3 Foreword After a decade and more of soaring household debt, it is time for the pendulum to swing back. Saving is of vital importance for both personal and broader economic reasons. Short term saving helps individuals and households to cope with life's temporary emergencies. Saving over the longer term can help address the challenge of longevity and make possible a more comfortable retirement than would otherwise be the case. And savings are vital for both government and business. They provide an invaluable pool of stable, long term capital for public infrastructure and for company investment and growth: the job and businesses of tomorrow. It is for these reasons that the sixth annual Scottish Widows Savings and Investment report is both timely and informative. Its extensive survey of more than 5,000 individuals across the UK provides a sharp, up-to-the-minute analysis of individual savings behaviour. It notes the actions that individuals have taken, the concerns we have about savings products and the impediments and disincentives to savings. Arguably the most surprising finding is how resilient savings have been in the face of intense pressures on household incomes and low confidence about the economic future. Only 11 per cent of those surveyed expect to see an economic improvement over the next 12 months. Yet in the face of this there has been a slight increase in the proportion of the population now saving. While this is still well down on the proportion recorded in 2009, the results speak to a powerful desire to save despite the squeeze on household incomes, ultra-low interest rates and worrying volatility in financial markets: a marked disincentive for millions of long term savers whose priority is capital protection. This combination of low rates of return on fixed interest saving and marked volatility in equity investment presents a major challenge for the industry. More than two thirds of respondents say that having no money available is a major barrier to saving. Added to this are concerns over public trust and confidence in savings products and product providers. Of those not saving for the long term, the report concludes, this is a group where there is a specific challenge for Government and industry to re-state the case for long term saving in a compelling manner. There are no easy or instant solutions to this problem. However, the situation is not without hope. The projected fall in inflation should in due course help ease the strain on household finances and permit a gradual recovery in confidence as the economy strengthens in future years. It would seem from this survey that individuals, the financial services industry and government can each play a part in helping to address the long term savings issue. As conditions improve, individuals can raise their pension contribution: even a modest initial increase helps reinforce a regular savings habit. The industry can continue to work on improvements in product simplification and transparency, concentrating in particular on savings schemes that have capital protection as their prime aim. And government can help by modifying a tax regime that penalises saving by double-taxing interest, income, capital gains and inheritance. This rebalancing of household finances from borrowing to saving is not a desirable outcome of a gradual recovery of confidence in the period ahead. It is a vital precondition of it. Bill Jamieson Executive Editor, The Scotsman 1

4 Part 1: Executive summary This is the sixth annual Scottish Widows Savings & Investment Report. In each case we have based the report on a national representative sample of the UK population. The summary was carried out online by YouGov who interviewed over 5,000 individuals aged 18 and over between the 4th and 9th January The aim of this research is to measure individual saving behaviour in terms of the actions they have taken, their attitudes and future intentions. By targeting such a large sample we can also drill into different segments of the population to see how attitudes and behaviours vary from the norm. The survey also looks at how attitudes have changed over a period of time and where consistencies remain. The economic environment continues to have a considerable impact on the UK population s ability to save, and people are becoming less confident about economic improvement as these challenging conditions continue. While the proportion saving remains much less than 2009, there is some encouraging news, with the 6% increase in savers since last year. Indeed the UK population is showing remarkable resilience in continuing to save in line with its expectations, again at a higher level than last year. However there is broad acceptance that this level remains insufficient to meet saving objectives, particularly over the longer term. Individuals continue to understand that they primarily have responsibility for their own saving, but are hampered by lack of money, mainly caused by increased living expenses. That said, some people might still be encouraged to save more, either through attractive investment vehicles that protect capital or though a particularly compelling savings objective. Picking up on the latter point: our survey highlights the continued call on money from children and other relatives, particularly young adults. This is generally unexpected and can be a drain on finances at a time the parent can least afford it. 2

5 Part 2: A challenging environment 11% of the UK population expect to see an improvement in the economy over the next 12 months. The economic environment remains difficult, and this inevitably impacts how much the UK population can afford to, or is prepared to, save. What is particulary interesting from our survey is the broadly held view that we are no closer to economic improvement today, than we were this time last year. Indeed only 11% of the population expects to see an economic improvement over the next 12 months. This represents a decrease from 15% in 2010 and continuation of a step change from the 29% high we saw in So the message has got through loud and clear to the UK that our economic troubles are much longer-lasting than was initially expected when the UK first entered recession. This perspective is not wholly shared by younger people, who are less able to contrast the current economic climate with anything they have seen before. Indeed, one fifth of year olds believe there will be improvement in the next 12 months, compared to only 8% of those over 45. The table below shows that this has been a consistent theme in recent years: How soon do you expect to see an improvement in the economy? All How much is the UK population saving? The good news from this year s report is that there is a slightly increased proportion of the UK population who are currently saving in some capacity; 68% in 2012, up from 64% in Furthermore, when we look at the 4 percentage point increase, it represents people saving for both the long and short-term. While this is a positive step, it again represents a step-change from 2009 when 77% of the population was saving and there is no suggestion from our survey that we ll get back to this level anytime soon. The trend in recent years is set out in the graph below: At present, are you saving for the short term, long term or not at all? 80% 70% 60% 50% Total 2009 Total 2010 Total 2011 Total % 40% 24% 15% 28% 10% 11% 20% 8% 40% 30% 20% 10% Similarly students (18%) are particularly optimistic and unsurprisingly, expectancy of economic improvement is materially higher among those working than those not (at 13% and 9% respectively). However none of these comparisons should mask the underlying conclusion that expectation of a swift recovery is low. 0% Total saving Short term Long term (Note: some respondents are counted as both short and long-term savers.) 3

6 When we turn to the amount actually saved over the past 12 months, again the story is one of modest improvement. The mean amount actually saved during 2011 was 2,399; an increase of 365 in Again though, we see a step change since 2009, with only 30% of people saving more than they did two years ago, with 57% saving less. Interestingly the decline in saving over that period is even greater as we look at older adults. This suggests that the UK population is setting realistic targets and demonstrates a degree of resilience in continuing to save despite the economic environment. However, the flip-side of the argument is that people continue to save too little and many might even save extra if they were prepared to set more ambitious saving targets. Returning to 2011, the amount actually saved exceeded expectations. The 2,764 represented 130 more than our respondents told us they intended to save; with a similar phenomenon in previous years. Men intended to save significantly more money than women ( 3,150 vs. 2,149) and while men were virtually on target, women saved 200 more than their intention suggested How much did you INTEND to save last year? How much did you ACTUALLY save last year? 3,305 2,511 2,283 2,632 3,467 2,642 2,399 2,764 Indeed, when asked about future intention, the mean amount that people anticipate saving in 2012 is 2,717; a figure that falls between what they had intended and what they had actually saved in Again a similar pattern to previous years. 4

7 Part 3: The national picture 72% Highest level of savings found in the east of the country. The regional perspective As always, the regional perspective highlights some interesting savings patterns across the UK as shown in the table below: Overall North Midlands Percentage saving 68% 68% 66% Amount saved 2,764 2,521 2,650 The short and long term Our report provides insight in to the balance of short and long-term savings. However, before we comment on what this tells us, we need to put people s perceptions of short and long term into context. The majority of people (83%) define the short term as up to two years, with almost everyone else regarding it as a maximum of 5 years. The long term is most commonly seen as 6-10 years (40%), but with 32% viewing it as somewhere between 1 and 5 years. These results are almost identical to the 2011 perspective. East London South Wales Scotland NI 72% 71% 69% 64% 67% 62% 2,502 3,678 2,874 2,482 2,601 2,480 The concern this raises is in relation to saving for retirement. When we look at year-olds and year-olds, only 10% and 16% respectively regard the long term as 20+ years. On the basis that these are age groups that should be thinking seriously about how they provide for their retirement (with very few now in non-contributory pension schemes), this short-term focus is concerning. The regions with the highest levels of people saving are the East and London, with the lowest levels in Wales and Northern Ireland. Wales and Northern Ireland have particularly suffered in the past two years, with 26% and 23% saving more in each area respectively and 61% and 58% saving less the two least favourable regional responses. Once again, our survey shows us that the UK population s saving is focused on the short term; 54% are saving for the short term and 47% for the long term in each case, including respondents who are saving for both. While both numbers are up on 2011 (at 49% and 44% respectively), the bias towards the short term remains. When we turn our attentions to the amounts saved in the past 12 months, we see a slightly different story; in other words, there is not always a close regional connection between the percentage saving and the amount saved. London has by far the highest average amount saved, followed by the South, with the lowest levels again in Wales and Northern Ireland. However despite the high percentage of savers in the East, this region offers a relative low amount of average saving. 5

8 The short-term savings objective The priorities of short-term savers reflect their apprehension towards the economic outlook. Specifically, 45% do not have a specific item in mind but are saving for an emergency/rainy day. This is particularly true of savers aged over 35 years old, where in each age group, consistently 50% state this objective. The next most common response is to provide a more secure future (11% of all respondents). The wording of this suggests longer-term motivation than emergency saving, but the fact it is labeled short term suggests some reluctance to earmark this money for the longer term and perhaps invest it accordingly. Those under 35 are more likely to be saving in the short term for something much more defined, with the most common objectives after emergency/rainy day in the age group being a wedding (14%), specific purchases (12%), travel (12%) and house deposit (11%). The graph below sets out the full list of short-term saving objectives, highlighting the difference between younger and older respondents: What is the main reason you are saving for the short term? Please select one. 50% 45% 40% 35% 30% For emergencies/rainy day To save for a house/deposit For specific events (wedding) For specific /purchases /presents) To provide me with a more secure future To have money to help my family if they need it To leave money to my family when I die To travel Other 25% 20% 15% 10% 5% 0% Total These proportions all look much lower than last year s report, however the overall conclusions are much the same. The reason for the discontinuity was that we asked the respondent to focus on the dominant driver, rather than all those that might apply. We believe this approach gives more insight to saving motivations. 6

9 25% of UK adults believe they are saving enough to meet their long-term needs. The drivers for long-term saving By far the most popular reason for long-term saving is to create a more secure future, with more than half of long-term savers (54%) stating this as their primary driver; a consistent pattern across population segment. Indeed the second most common answer relates to emergencies / rainy day, which in some respects becomes a similar response in conjunction with a long-term perspective. While the reasons for long-term saving look robust, the amount being saved is broadly seen as inadequate. Only a quarter of UK adults (25%) believe that they are saving enough to meet their long-term needs, although a further 31% believe they are not far off. This is where a more ambitious saving target may be valuable for some; though more fundamental issues exist for the 39% who say they are definitely not on track. Of those not saving for the long-term, a third (33%) claim that they do not have any money available to save. On the other hand, the failure to save for the long term represents a conscious choice for others, with one in four (27%) identifying their priorities as short-term only. This is a group where there is a specific challenge for Government and industry to re-state the case for long-term saving in a compelling manner. Again the graph below shows the full list, drawing out the differences between younger and older respondents. What is the main reason you are saving for the long term? Please select one. 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Total For emergencies/rainy day To save for a house/deposit For specific events (wedding) For specific /purchases /presents) To provide me with a more secure future To have money to help my family if they need it To leave money to my family when I die To travel Other

10 Part 4: Barriers to saving 68% of the UK population state that having no money available is a major barrier to saving. As with last year, two-thirds (68%) of the UK population state that having no money available is a major barrier to saving. While we might expect this barrier to relate very directly to low levels of earning, in fact there is a greater objection to those earning 30-40k (72%) than those earning 15-30k (66%). Similarly, it s a broadly equal objection across those working full-time, those working part-time and those in full-time education. This suggests that no money available appears to relate as much to other calls on money than it does about earnings. Other potential obstacles are secondary by comparison, and are seen much more as minor barriers to saving. These are set out in order of decreasing importance in the table below: On the subject of trust: there s a strong suggestion in the table that this relates as much to perception as to actual experience; something that s brought through in the previous bad experiences line. However, there are clearly fundamental issues in this area for the financial services industry to address before consumers are more willing to trust them with their savings. What might encourage customers to save more? If my investment was protected % 35% Major barriers to saving If I needed to save for something (e.g. house, wedding) 29% 27% Major factor Minor factor If I didn t have as much debt 24% 27% 80% 70% If savings products were generally easy to understand 20% 24% 60% 50% If I was approaching retirement 11% 11% 40% 30% 20% 10% 0% No money available Don t trust financial services companies Requires too much effort Prefer spending Difficult to understand Previous bad experiences This reinforces the encouragement to industry to simplify its offer and respond to the need for more protected investments that recognise their clients appetite for investment risk more on this later. Indeed, we see a significant increase here since last year. We also see that people are naturally motivated to save for a specific goal (such as house purchase or a wedding), but are less clearly motivated by the less tangible need to provide for their retirement. While it might be easy to conclude that non-saving can be directly attributed to a lack of money in challenging economic conditions, there are other important barriers that are more directly addressable, whether by industry or government. For example, a drive towards simplicity would be welcomed and might also address some of the trust issues highlighted in the research. 8

11 Part 5: Investments 25% of UK adults have invested the full allowance into a cash ISA. The investments held by the UK population remain heavily cash based as the illustration below highlights: Most commonly held savings products % 47% 13% 11% Cash Savings Account Cash ISA Stocks and Shares ISA Fixed Term Savings Account This picture doesn t change quickly and as we might expect, is largely unchanged on last year. There are small reductions to ISA holdings and to fixed-term savings account holdings, with a slightly greater percentage in cash savings. This suggests greater reticence to commit to longer-term investment and arguably to accept investment risk. This general bias towards cash investment is very much in line with the UK population s preference for short-term savings. There is limited holding in real assets like stocks and shares, which we know tend to produce more volatile outcomes in the short term, but have their place in a longer-term portfolio. This becomes particularly important in guarding against inflation risk to cash holdings; something that savers are either willing to accept or potentially unaware of. When we drill further into specific segments, we see that men are twice as likely as women to invest in Stocks & Shares ISAs (20% and 11% respectively). There is also an age dimension to investment with 42% of those under 55 holding a Cash ISA compared to 55% of those aged 55+. When asked if they have ever invested the full ISA allowance into an ISA, a quarter of UK adults (25%) claim to have invested the full limit into a Cash ISA compared to only 3% who have reached the limit of a Stocks and Shares ISA. Even allowing for the affordability issues highlighted earlier, this suggests that the UK population could be encouraged to make much greater use of this tax advantage. When we ask about intentions for the year ahead, only 13% of people are planning to put money into stock market related investments over the coming 12 months, with 4% doing so only in conjunction with a product that protects their original investment. The remaining 9% are split equally between those who already investment in the stock market and those who see specific opportunity in doing so. This aversion to investment risk is reflected in the following table, which also highlights the unsurprising difference in attitude between younger and older respondents. This asked respondents to state their preference from a range of different types of investment: Please imagine you have 5,000 that you wish to invest for a period of 5 years. Which ONE of the following investments options would you be most inclined to take? A guaranteed increase to 5250 with no possibility that it will fall A potential increase to 6000, but the possibility that it will fall to 4500 A potential increase to 7500, but the possibility that it will fall to 3500 A potential increase to 10000, but the possibility that it will fall to 0 All % 42% 58% 25% 31% 18% 9% 12% 5% 1% 1% 1% Not sure 17% 15% 18% 9

12 While we might argue whether these trade-offs are worth taking as we move up the risk spectrum, the over-riding sentiment of the table is that most people are uncomfortable with the trade-offs outlined, particularly when they put a material amount of their original investment at risk. Finally, we ve tracked how the UK population prefers to take out Savings and investment products. In headline terms, 38% prefer to do so in person at the branch of a financial organisation, with one in three (32%) favouring the web, whether through a financial organisation (19%) or a comparison site. What s remarkable here is that the proportion preferring an in person sale is unchanged at 38% since 2008, signaling that the area of investment is one where face-to-face interaction is particularly valued. 10

13 Part 6: Financial support for family We have seen a growing trend of giving or loaning money to family members and this is something we ve tracked in our Savings & Investment Report in recent years. The headline message in 2012 is that the total amount of money family members are giving or lending to children has increased by 31 per cent in the last five years. As economic conditions continued to decline, the average amount of money given or loaned to children and grandchildren in the UK is now at an average of 12,846. Substantially more money has been loaned to children than to other family members, with an average of 13,300. This is a significant amount of money in the context of saving, and the incidence of such payments seems to be increasing. One third of UK adults with children (33%) have lent them more than 10,000, up from 29% in 2010, and loaning money to children increases with the child s age. The three most common uses of money loaned to children have been: living expenses (37%), paying off debts (37%), and a house deposit/purchase (32%). An emerging feature in recent surveys has involved adults giving (or lending) money to their parents. In this year s survey, 9% of those with parents claim to have given them money, with more than half (56%) of these involving sums in excess of 2,000. On average parents were given 5,900, with by far the most common reason being to cover living expenses (43%). Surprisingly, 17% of year-olds claim to have loaned money to their parents. Of those with grandchildren, 7% have loaned money to them; more than half of those giving them more than 1,500. Around one in five of those grandchildren used the money for living expenses (21%), paying off debts (21%), education fees and expenses (20%), or a car (19%). On average the amount given to grandchildren was just over 4,800. The most common source for the money that people loaned to family was cash accounts (56%). 6% have even taken out loans in order to help their family. Consequences of loaning this money have been saving less (26%); and in one-fifth of cases, making this payment has resulted in some change to the respondent s way of life. For example, 19% say they have not been able to afford luxuries or treats and 18% have cut back day-to-day spending: Overall, the amounts of money involved here are significant, with the average payment to a child (of 13,300) representing around five times the average amount saved over the past 12 months. It is unsurprising therefore that these payments often involve an element of compromise, either to other savings or to lifestyle. There is little evidence of any pre-planning in this area, but it makes much sense to do so, given the significant amounts involved. 11

14 Part 7: Conclusion and key challenges Our survey highlights the impact of economic conditions, with only limited recovery from a step-change in savings habits since There is little hope of economic recovery in the short term, resulting in a realistic expectation of future savings levels. We ve seen a modest increase in the proportion of people saving and the average savings level over the past year. Indeed most people have met their savings goals, demonstrating resilience in their attitude to saving, but there is broad acceptance that it s not enough. Despite people living ever longer, the focus on most investment remains on the short term and being able to cope with emergencies, generally within a 2-year timeframe. Even where people are saving for the longer term, this tends to be seen as around 5 years, rather than providing for retirement. This is reflected in the manner of saving, which is typically cash-based, rather than making use of longer-term investment vehicles. The UK population understands that they (not the state) are responsible for their financial future, but is limited by lack of money, most often from increased living expenses. However there might be greater appetite if investment vehicles could be more compelling, involving capital protection, and individuals have clear saving objectives. We highlight in particular the strain on savings from giving or loaning money to family members. Our survey highlights that there are considerable sums involved here, at a time when the parent can least afford to pay them. This is a clear example of a planning need that s largely ignored in the UK. Scottish Widows remains committed to encouraging and enabling people to save and we look forward to working with the Government, financial advisers and our customers to achieve this. 12

15 Recommendations This year s Savings & Investment Report underlines both the extent of people s short-term focus when it comes to financial planning as well as the depths of our aversion to taking risk (perceived or real) in long-term investments. While natural and understandable, these traits raise significant challenges when considering how to encourage more people to save for the long term. Even if we can encourage more people to save and invest for the future, we face the additional challenge of overcoming risk-averse mindsets which when it comes to long-term investment decisions, could undermine consumers ability to achieve the best results with their savings. We believe the evidence in this report points to the fact that we need a joined-up approach to tackling the UK s savings challenge with the industry and Government working closely together to: create an environment where consumers have a greater understanding of the need to save for the long-term and the value of appropriate risk in financial decision-making The UK has a low-risk appetite, which does not always deliver the best long-term financial security for consumers, particularly for certain segments of society. Inflation is a risk to cash savings that few consider, and it can be particularly damaging over the longer term. In order for the UK s saving rate to improve, Scottish Widows is calling for the Government and industry to work together to develop a joint campaign to increase consumers understanding of and appetite to risk. give consumers confidence their savings and investments will be protected by regulation but that they still have access to a range of quality products. At Scottish Widows, we believe that financial regulation should promote consumer protection, consumer confidence, access to financial advice and fundamentally, encourage people to save. The Government has committed to delivering simplified advice for consumers, but despite this, some financial products remain a minefield, with over 100 pages needed to sell a stocks and shares ISA alone. The industry must work with the Government to find a way to communicate with consumers in plain English to ensure that people are provided with the advice they need to understand the products that are right for them. In order to establish this, Scottish Widows is calling on the Government and industry to work together to develop a regulatory framework which enables a simple advice process whilst ensuring the highest standards of consumer security. 13

16 As part of the Lloyds Banking Group, Scottish Widows is proud to be an Official Provider of the London 2012 Olympic and Paralympic Games. Scottish Widows plc. Registered in Scotland No Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: Scottish Widows plc is authorised and regulated by the Financial Services Authority. Our FSA Register number is /12