‘Nudge’ tactics could boost the pensions of younger savers by up to £142,000, according to new research.
Scottish Widows and the Behavioural Insights Team, a leading behavioural science organisation, researched the key factors that might motivate and encourage people to save more.
The study — of more than 3,000 22-29 years olds — found that relatively small prompts could lead to these savers having an extra £7,000 a year in retirement.
However research carried out alongside the experiments found young people were relatively pessimistic about their retirement. Nearly 90 per cent stated they were either not at all confident, a little confident, or moderately confident they were doing enough for their retirement.
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, beyond these financial constraints’ the two most common answers were simply they hadn’t thought about retirement or savings (21 per cent ), and didn’t know how to increase their contributions (15 per cent).
Given this, Scottish Widows says these psychological ‘nudges’ have the potential to make a different to the retirement prospects of many of those in their 20s today.
The three key findings were:
Labelling makes a difference: By including tangible explanations such as ‘a 12 per cent contribution would keep you above the poverty line’ and ‘a 15 per cent contribution would allow for a comfortable retirement’, twice as many young people would recommend almost doubling pension contributions from the default minimum of 8 per cent to 15 per cent.
Reframing investments over savings: When participants were asked how much to ‘invest’ in their pension as opposed to how much they should ‘save’ – the amount they recommend someone puts aside shot up by a third (34 per cent).
Prompts drive engagement: Once young people start actively thinking about their future, they’ll care more about their retirement prospects. After answering a set of questions about where they see themselves in the future, the number of participants who want to raise their pension contributions increased by 11 per cent, equivalent to 800,000 young people saving more.
Scottish Widows head of policy Pete Glancy says: “Young people are faced with a unique set of challenges when it comes to saving for retirement.
“We’re now exploring behavioural science and nudge theory, which we know can play an important role in helping people to save for their future.
“Combined with more systemic reforms to the pensions landscape – such as the removal of the minimum earning threshold – this experiment shows that small interventions could be instrumental in making big changes to the way young people save for retirement.
“We’re looking at how this study can be used to help get more people saving, and we are sharing the results with the industry, stakeholders and charities because real progress can only be made if we work with others to tackle this complex challenge.”
The research also found most people wanted to retire by 64 at the latest (63%) but expected it to be much later. In fact, over one in five (21.9%) expect to either retire after 70, or never actually stop working.
Before Covid-19 hit, nearly half (49 per cent) of 22-29-year-olds were not saving adequately for retirement meaning they face working for far longer than they expect to, or retiring with only enough money to cover the basics.
This situation has only intensified with mass unemployment looming and more than a quarter (26 per cent) of 18-24-years-olds having already lost their job or been furloughed. Sectors and jobs that young people disproportionately work in, such as hospitality and retail, part-time and zero hours, have also been the most affected.