There are many shocking statistics that highlight the seriousness of the financial illiteracy crisis in the UK. Recent reports produced about our country’s financial literacy highlight that only 38% of people understand inflation, more than 30% of people fail to carefully consider purchases, and that the average pension pot in the UK stands at less than £50,000 per person.
The costs and consequences of financial illiteracy are only just beginning to be recognised, but I’m hugely concerned by the implications. The fewer people have savings, income and solid pensions, the more likely they are to fall on hard times, and if they’re as financially illiterate as reports suggest, I have doubts over whether they’ll be able to handle the financial challenges of retirement, illness or unexpected costs.
What’s worse, financial illiteracy appears to be a global issue, not just a concern for us here in the UK. According to numerous research studies and surveys, people of all demographics and numerous geographic locations are challenged by basic financial computations. It’s no wonder the implications for financial security and retirement planning are so serious.
Those of working age and those that have retired are increasingly being forced to take personal responsibility for their retirement and financial savings, as defined benefit pension plans are replaced with defined contribution plans and social security programs face insolvency. As a result, people are now faced with a bewildering array of financial decisions and products designed to provide solutions.
What could happen next?
Anyone that knows me well will understand my dedication to personal responsibility and my eternal lamentation that this appears to be a fleeting attitude for many people. Many people are starting to wake to the reality that the national insurance pot we’ve all been paying into has essentially been a giant Ponzi scheme that’s collapsing, and consequently are starting to demand redistribution of wealth. Despite a rapidly rising retirement age, millions of people across the country are almost entirely dependant on the national pension to retire; a system that pays only a few thousand pounds a year and which is draining more and more of our country’s resources as we keep trying to fund it,
If changes to our national pension system continue to be the third rail of politics, tax increases or even further reductions in entitlements are guaranteed. Increases in personal income, capital gains and dividend tax rates are potential sources of income for our government to plug the gaping hole in our national retirement requirements, as well as higher property taxes, increases in VAT and one-off ‘wealth taxes’.
Nobody could possibly know exactly how this will play out. However, it is important to recognise the impact will almost certainly be felt by all of us – not just those who failed to plan. The best protection people have is education; education about their options, the risks and challenges, and the undertaking of proper financial planning on the part of our citizens.