‘Nudge Unit’ finds psychological hacks that encourage the under-30s to save more for their retirement.
Younger people could easily be ‘nudged’ into saving enough for an extra £7,000 a year in pension income, making nearly two million of the under-30s better prepared for retirement.
These pension pots could rise by £142,000 on average, according to research by insurer Scottish Widows and the partly government-owned Behavioural Insights Team, or ‘Nudge Unit’.
‘Nudging’ is the art of using simple cues to encourage positive behaviour, often relying on psychology and understanding human behaviour.
Getting young people to picture their future selves, and introducing simpler language around pensions, were just two small changes shown to boost future retirement pots.
Psychological testing on around three thousand 22-29-year-olds across the UK revealed what might make them save more, particularly at a time when the economic outlook and jobs market looks bleak.
Explanations such as ‘a 12% pension contribution would keep you above the poverty line’ and ‘15% would allow for a comfortable retirement’, meant twice as many young people would recommend almost doubling pension contributions to 15%, up from the default minimum of 8%.
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Talking about investments, not savings, also saw contribution levels shoot up – when participants were asked how much to ‘invest’ in their pension, rather than how much they should ‘save’, the amount they recommend someone puts aside rose by a third.
Finally, answering questions on where they see themselves in the years to come meant 11% more participants wanted to raise their pension contributions. That is equivalent to 800,000 young people saving more.
Pete Glancy, head of policy at Scottish Widows, says: “Young people 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.
“Combined with more systemic reforms to the pensions landscape – such as the removal of the minimum earning threshold – this experiment shows small interventions could be instrumental in making big changes to the way young people save for retirement.”
The Association of British Insurers trade body has found the lower paid and the young are missing out on valuable tax relief that would benefit their pensions.
More young people are paying into their pension, but the tax system benefits older people.
Around 42% of those who contribute to a defined contribution pension are under 40, but they only receive 27% of the available tax relief.
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People in their 40s and 50s receive two and half times as much tax relief from the government.
Most people (63%) in the Scottish Widows research wanted to retire by 64 but expected it to be much later. More than one in five expect to either retire after 70 or never stop working.
Research by the Institute for Fiscal Studies think tank forecasts young people, especially young women, will be hit particularly hard by the economic fallout of coronavirus. Even before Covid-19 hit, nearly half (49%) of 22-29-year-olds were not saving adequately for retirement, according to Scottish Widows.
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 the two other most common reasons were simply they hadn’t thought about retirement or savings (21%), and didn’t know how to increase their contributions (15%).
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