A dozen reasons our financial lives are in a mess

It’s no wonder we get it so wrong about our money. New research by Ipsos MORI and King’s College, London shows that the public have a number of significant misperceptions about personal and public finances. In particular, it’s the cost of the big life events – like having children, going to university and retiring – that we underestimate, and this has implications for the financial services industry and government alike, as well as the wellbeing of the general population.

1. We massively underestimate the cost of raising a family; the average guess at what it costs to raise a child to the age of 21 is £50,000 – when the actual figure has been calculated as more than four times this at £229,000. And this misperception isn’t the result of inexperience; the average guess among those living with children is only £40,000.

2. But we also overestimate the cost of childcare; people think that the average cost for 25 hours of nursery care for a child under two is £200 per week when the actual figure is nearly half that (£115.45 per week).

3. We hugely underestimate the cost of a university education. On average, the public think that today’s students leave university with £21,000 of debt (including tuition fees). However, the actual figure, according to a recent study, is more than double this, at £44,000. Unsurprisingly, younger people tend to be more accurate on this question – the average guess among those aged 16–24 is £30,000.

4. People also hugely underestimate how much they’ll need to put into a pension. People think they only need to save £124,000 into a private pension in order to get a total income of £25,000 a year in retirement (the average among current pensioners), assuming they were also claiming the full state pension. Pension calculators suggest that the true figure is more than twice this at over £300,000. Younger people are more likely to underestimate what they need to put away for later life: over half of those aged under 35 think they need less than £100,000 – which would provide a total pension (including state pension) of only around £12,000.

5. Despite this low estimate of required pension pots, people also greatly overestimate how many of us are not saving enough for retirement; the public think that two-thirds of the UK population (65%) are not saving enough for their retirement – much higher than the official estimate of “under-savers” (43%).

6. People get some things right: we get very close to the average cost of a house in the UK. The average figure given by the public is £190,000, just slightly out from the true cost of £194,166. There are large regional differences here though; 29% of Londoners think the average UK price is over £300,000 – a reflection of the high prices in the capital.

7. But we are much less accurate on the average deposit put down on homes. The public think the average deposit in Great Britain is £20,000 when, in fact, the figure is £72,000. Only 1% suggested a figure between £70,000 – £79,000.

8. And while half (49%) of us correctly identify that the current Bank of England base interest rate is 0.5%, it seems we have got used to these historically low levels; when asked what the average Bank of England base interest rate has been over the past 40 years, the average response is 4% – almost half the true figure of 7%.

9. The public are also very accurate on the average full-time salary, before tax: the average answer given is £25,000 – very close to the true figure of £27,200.

10. But we are much less accurate when it comes to thinking about highly-paid groups; the public think that one in ten (10%) earn more than £150,000 a year when in reality just 1% do. And, when told what percentage of the population this top income group makes up, the public significantly underestimate what they contribute to income tax; on average we think they pay in 10% of all income tax paid, when in fact, this 1% contribute 28% of all income tax.

11. Many of us are confused about what has happened to the national deficit and debt since 2010; 42% correctly identify that the deficit has decreased, but 32% think it has increased and 26% don’t know. Half of us (47%) correctly identify that the national debt has gone up, but 28% think it has decreased and 25% don’t know. Our accuracy on this is related to our political attachment. Conservative voters are more likely to believe that both the deficit and the debt have gone down – 63% say the deficit has decreased with 45% saying the same of the national debt. In contrast, only 35% of Labour voters think the deficit has reduced and only 22% that the national debt has gone down.

12. But the public do, on average, have an accurate view of the price of a pint of milk, that classic cost of living question often put to politicians. The average person guesses at 50p, compared with the actual 49p. But plenty of us give answers that would see politicians ridiculed: 10% of us think it is 29p or less, and 6% think it’s over £1.

Bobby Duffy, Managing Director of Ipsos MORI Social Research Institute, said: “We get a number of crucial things wrong about our personal and national finances. In particular we hugely underestimate the real financial implications of big life events and decisions – particularly having a family, going to university and retiring. It’s concerning that we think under-saving for pensions is a very widespread social norm, when that’s not really the case. This is important – we know that our perceptions of what normal behaviour is can be a strong effect on our own behaviour.

“The things we get more correct are the figures we see regularly reported in the news – house prices, interest rates and average wages. But the findings show underlying knowledge around these is very shaky. In particular, we hugely underestimate the historic level of interest rates – we’ve forgotten how unusual the current low rates are.

“The findings have implications for our personal finances – but they are also important to politics and policy. We have a very wrong view of how common very high wages are, which may make us focus too much on how that group is treated. But on the other hand we also grossly underestimate what this well-off group contributes to public finances.

“Similarly, what’s happening to public debt and the deficit was a crucial election issue, but many people’s understanding is limited, and is highly related to our political beliefs.

“We know that it is a real challenge to shift these misperceptions – but government, financial advice services and the media can all help through clear, consistent and compelling communications.”

Professor Denise Lievesley, Dean of the Faculty of Social Science and Public Policy at King’s College London, said: “It’s concerning that there are so many misperceptions from a significant proportion of the public about finances that directly impact the lives of individuals and their families. Knowing the true cost of living is essential for accurate financial and life-planning, so it’s vital that we find better ways to improve public understanding of these issues.

“The average cost of a home deposit, the cost of raising children and level of pension contributions are all issues that, with a sound understanding, can help people plan securely for their future.”

More information on the Ipsos-MORI website.

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