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Top five financial problems – how to solve them

Top five financial problems – how to solve them

Category: Money
02/08/2017

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Securing your financial future can sometimes be easier said than done, with other priorities often getting in the way. This can lead to a definite "head in the sand" situation when the task ahead seems unsurmountable, but nothing's impossible. Here we look at the top five financial problems, as discovered by financial advisers Drewberry, and identify ways to tackle them and take back control of your finances.

1. Lack of retirement savings

Drewberry found that most Brits aren't saving anywhere near enough for retirement, with 18.2% of respondents having no pension whatsoever. Even among those who do, 50.2% have no idea what their pension's worth, while most of the remainder are worryingly underprepared.

For example, 44% reported that their pot is worth less than £10,000, while the majority (80%) have less than £100,000 squirrelled away in pension savings, with just 5% having a pot worth £400,000 or more.

A further 19.3% don't know how much they contribute to their pension – and among those who do, 13% don't pay in anything at all, while 79% contribute less than 10% of their take-home pay. As a result, 20% have no idea when they'll be able to retire, while 10% don't think they'll ever be able to afford it.

"This is another very worrying report card for working Britain," commented Tom Conner, director of Drewberry. "A great many Britons are clearly sacrificing their pension contributions to keep their day-to-day lives afloat."

So what can you do? Well, get saving! It sounds simple enough, but can be harder in reality – yet it really is the only way to secure your financial future. If you haven't yet signed up to your workplace pension scheme, make sure to do so as soon as possible, and if you can, try to make more than the minimum contributions. You may want to look into additional methods of saving, too, such as cash ISAs or the new Lifetime ISA, or even a stocks & shares ISA if you're comfortable with more risk.

2. Lack of health insurance

The research further found that Brits are three times more likely to have health insurance for their pets than for themselves, with 24% of respondents having some form of pet insurance compared with just 8% who have private medical insurance, while only 11% have critical illness cover and just 6% have income protection.

Not only that, but just 37% have life insurance of any kind, even though 43% have an outstanding mortgage and 62% have children. "The scarcity of discretionary income is having an impact on how Britons are choosing to insure themselves," said Tom. "This looks like another instance where more education is required."

This kind of insurance isn't a legal requirement, which means many may be tempted to forgo it – but that doesn't mean you should. It can provide a valuable lifeline should the worst happen, so make sure to compare life insurance, health insurance and income protection to make sure you, and your family, are covered.

3. Lack of engagement

The report went on to reveal a more general lack of engagement with savings, pensions and tax planning as a whole, with 66% of respondents unaware that pension contributions receive tax relief, while 44% wrongly believe that ISAs pay it. Similarly, over 60% don't know what assets will attract inheritance tax – within that, 92% wrongly believed that their pension was liable to such tax – while 87% have done nothing to assess their current liability.

Much of this is thought to be down to a lack of communication on the part of providers and Government, with such matters often being difficult to understand at the best of times. Indeed, additional figures from Close Brothers Asset Management show that 72% of British adults don't understand the UK pension system – 26% find changes in legislation confusing, and 29% find the products available confusing – with just 7% believing that they do.

This confusion extends to their own pensions, too, with 40% admitting to not knowing the number of pension pots they have, and 73% unsure of the value of those pots. Despite this, 72% have never taken professional advice about their pension. "Widespread confusion brings with it a real threat that people are not saving enough for retirement," said David Newman at Close Brothers Asset Management, suggesting that a retirement funding gap could be on the horizon.

The key here is to get educated and engaged with your finances, whether that involves finding out more about pensions and tax planning as a whole, or focusing on your own savings pots. You can read our guides to get started, but don't be afraid to seek specialist advice for complete peace of mind.

4. Unwillingness to take risk

No-one likes to take unnecessary risk with their money, but sometimes a little bit of risk can pay off in the long run – particularly if you're looking to get more from your savings. Drewberry's research found that 41% of respondents have cash ISAs, more than three times the number who have a stocks & shares variety (13%), with 40% having no risk-based savings whatsoever.

"Despite today's ultra-low interest rate environment working Britons still have a clear preference for 'risk-free' investments, even though cash held on deposit will naturally decline in value due to the UK's negative 'real rates'," said Tom. "This underlines that too many Britons still prefer to opt for something familiar that they understand."

But it could be time to change that. As Tom points out, keeping your money in cash means it's actually losing money in real terms, with inflation easily eroding even the best savings rate. While you of course don't want to risk your entire savings pot, it may be worth putting some of it in a stocks & shares ISA – but make sure you understand the risks, and seek professional advice to make certain.

5. Lack of advice

Unfortunately, it's a general lack of willingness to seek professional advice that could be compounding the above issues, according to Drewberry, with 65% of respondents having never received financial advice. Among those who have, 63% thought they were better off as a result, so it could well pay off.

"With almost two-thirds of us never having received advice, it's little wonder that so many Britons are still so poorly equipped for retirement," said Tom. "It's clear that we still have a great deal of work to do in order to close the advice gap." So start closing it! Seeking the right advice can be the key to ensuring your financial problems are effectively dealt with, and can ultimately make sure you stay in control.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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