Risk-averse UK savers could be missing out on £140,000 return on their investments and facing the prospect of working longer to fund their retirement, our research shows.
Younger savers with time on their side to see investments grow are also choosing to take an overly cautious approach. This widespread apprehensive approach to individual finances is revealed after our Tackling the Savings Gap investigation asked over 10,000 consumers about their savings habits. As part of the research savers revealed a) how much they are managing to save; b) the factors that influence their investment decisions; and c) their own attitude to risk when it comes to investing.
Savers cite risk as the greatest factor influencing their decision on where to invest. 62% of savers also identify themselves as being defensive or cautious investors, with only 6% saying they would select a fund designed to deliver capital growth.
On average British savers are putting £238 per month toward their retirement, based on data from a survey of over 10,000 people collated throughout 2014. If this were invested into a balanced portfolio over a 45-year working life, it could achieve approximately £510,000. If the same £238 per month were invested into a cautious portfolio over 45 years, the projected returns reduce by £140,000 to £370,000.
As part of our Tackling the Savings Gap campaign, savers have said that they would need £23,000 as an income per year in retirement to enable them to live comfortably. That would require a pension pot worth at least £460,000.
But data shows 62% of the savers putting aside an average of £238 per month for retirement will fall short of this figure.
Risk aversion and failure to save enough each month means the majority of savers are on course to miss out on a pension that will allow for a comfortable retirement.
Only 38% of savers – those investing in balanced, capital growth or aggressive funds – are projected to see returns of more than £460,000.
The choice for thousands of British savers is simple: Save more money or adopt a longer-term approach to investing and re-evaluate whether your risk profile is too low.
Factors that ultimately determine the returns investors may achieve include a fund’s performance, objectives, fees and charges and diversification. The risk profile of the fund was however rated by savers as the factor most likely to influence their decision.
We believe that younger people in particular may be sacrificing too much by taking an overly cautious approach, compounded by a lack of understanding about the way stock markets work.
Our Managing Partner David Harrison said: “Investments can be complicated but generally savers understand that their performance fluctuates over time.
“A young investor saving for retirement should be most interested in seeing solid growth, whereas an investor approaching retirement may wish to see more stability. What we have currently is high levels of cautious and defensive investment strategies across all age groups.
“We are not saying that savers should throw caution to the wind and in any case the problem is not with savers themselves. Regulations governing products and the advice process put many people off investing as it leads them to believe that investments are highly likely to lose value whereas cash is seen to be completely safe. As we have seen in recent years, that is untrue. A sensible strategy is to make sure that investments are spread and not simply all funnelled into one type of fund with a low risk profile.
“Equities have been proven to deliver long term value. Cash savings however always struggle to beat inflation, leaving savers with little or no growth. It is essential to take a big picture view of investing. Unfortunately society’s appetite for instant gratification means that a full generation is simply unaccustomed to saving and investing over the long-term.”
Sharon Collard, Professor of Personal Finance Capability at The Open University’s True Potential Centre for the Public Understanding of Finance (True Potential PUFin) said: “These survey findings complement our belief at True Potential PUFin that there will always be room for improvement when it comes to helping UK consumers make sense of their own personal finances, savings and investments.
“Our new independent research paper ‘Towards a Common Understanding of Risk’ looks in detail at consumer understanding of risk in relation to investing. It shows whilst the financial services industry tends to focus on assessing consumer attitudes to financial risk, for example the volatility of investments, consumers’ perceptions of risk are also greatly influenced by their goals, emotions and circumstances. By making sure that these other factors are taken into account in risk assessment processes, the industry can help ensure that consumers achieve the investment outcomes they want.”
If you want to check the level of risk you are taking within your portfolio is suitable, log in to your client site to speak with your financial adviser.
Alternatively, if you’re looking for financial advice, you can search our directory to find your local True Potential Wealth Management Partner.
Your capital is at risk. Investments can fluctuate in value and you may not get back the amount you invest. Past performance is not a guide to future performance. Tax rules can change at any time.