Why the savings gap can’t be ignored

What you’ll learn:

• How gaps in awareness and understanding mean many are at risk of not saving enough
  
• Why knowledge of investment products doesn't always translate into using them
  
• How banks can help and what Barclays is doing to raise awareness.
  

Clare Francis, Director of Savings and Investments, outlines why the British public must take greater responsibility for their future financial security.

Drawing on new research that we’ve carried out, Clare examines customer attitudes towards saving and highlights the importance of aligning savings behaviour with current and future income needs. Clare also urges the financial services industry to rethink the way it helps people make suitable financial decisions, from saving regularly to planning for all eventualities.

The current picture

The majority of people in the UK recognise the value and importance of saving. But a lack of awareness and understanding means many are at risk of not saving adequately for the future. This must be addressed now.

Put simply – we need to be saving more. The state pension isn’t enough to provide the retirement many seek, or hope for. Additionally, many parents want to help their children cover the rising costs of further education and spiralling house prices are making it increasingly difficult for people to get a foot on the property ladder.

In the immediate aftermath of the financial crisis, it looked like people had rediscovered financial prudence with the savings ratio leaping to 11.8% in 2010. However, it has now lapsed to below 5% and there’s a risk that UK citizens will fail to align their savings behaviour with their current and future income needs.

So what’s being done?

The issue of the savings gap is widely recognised. In recent years we’ve seen a number of legislative changes and initiatives launched by the government to try and encourage people to save more. These include pension freedom, increased ISA flexibility and the introduction of the Personal Savings Allowance (PSA). However, it’s not been enough to significantly change behaviour so far. There are several reasons for this, but one cause can be attributed to market complexity.

On the one hand, it’s great that people have more freedom to make more of their own financial decisions. But choice isn’t always a good thing, especially if the options available are complex and confusing. Simplifying these options so they’re easy to understand will ensure more people make use of what’s out there. Ultimately, competition is good for consumers and the industry.

There’s no easy solution to fix this problem but there are a number of ways banks and other financial institutions can help empower people and give them the confidence to make the best decisions.

What are we doing to help you?

Generation X say they’re the most squeezed of the age groups and, in many instances, can’t afford to save – but they need to. So, we have to start looking at ways of shifting mindsets and getting people to start putting money away for future financial goals.

Education is essential when it comes to tackling inertia, helping individuals to recognise their needs and understand the options available to them.

For example, as part of our recent tax year end activity, we focused specifically on improving awareness of ISAs and how they work.

Our research found that even though more than 21 million people have a cash ISA, 40% hadn’t made a single deposit during the 2015/2016 tax year, despite having an average of £42,000 in cash savings – more than double the annual ISA limit. Collectively, this cost savers almost £1bn in lost interest.

The PSA has also created a need to ensure people understand the difference between it and ISAs. It recognises that ISAs still have an important role to play in financial management, while understanding that tax rules could change in the future and that their effects depend on the circumstances of the individual.

Another area of focus is the ‘leap’ from cash savings products to investments. In this low interest rate environment, it’s important that people are informed of the risks of loss involved and at least consider investing in other asset classes but often many don’t – they see investing as complicated and with reduced options for affordable advice and guidance they don’t have the knowledge and confidence to ‘take the plunge’.

So we’re looking at how we can break down these obstacles and create tools and support that will help inform people, giving them the confidence to act.

While face-to-face financial advice may not be as readily available as it used to be, technology is presenting other ways of helping people make the best decisions regarding their finances.

Digital empowerment was a key theme of the recent FAMR report [PDF, 1.1MB], and one of the things we’re focused on is using technology to make your experience simpler, easier and quicker.

Action we must take

The savings gap can’t be ignored but there are steps we can take – and are taking – to educate, inform, encourage and empower people to be more proactive when it comes to planning their finances and thereby securing their futures. Helping people make the best decisions based on their needs and financial goals is critical to the future financial health of the UK.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.