Effect of inflation on savings not understood by majority of Brits
Less than half (44%) understand impact of inflation on savingsFewer still (37%) understand compound interest on savingsOver 65s are the most confident – and the most knowledgeableYoung people more confident than people in their fifties, but get it wrong more often
New research from Aviva shows that the hidden impact of inflation on savings, and therefore buying power, is not widely understood by more than half of Brits today.
The survey asked a series of questions exploring people’s understanding of some basic financial principles, including the impact of inflation and compound interest, the concept of risk and reward and the importance of lifestage in financial planning.
Only 44% of the respondents correctly identified the buying power of money when savings interest rates and inflation rates are taken into account. Even amongst those who described their financial knowledge as ‘very or moderately good’, only half got the answer right.
However, previous experience of high inflation seems to have proved a long-lasting lesson, as even those over 65 who describe themselves as ‘not very or not at all confident’ get it right more often (31%) than the confident 18 – 24s (30%).
The impact of compound interest on savings was correctly understood by fewer than four in ten (37%), and by less than half (45%) of those describing themselves as ‘very’ or ‘somewhat’ confident.
Sam Mirehouse, MD Aviva Financial Advice, commented :“Whilst it is encouraging that nearly 6 out of 10 people consider that they have good financial knowledge, the figures also suggest that people’s confidence isn’t always justified.
“If someone thinks they have good financial knowledge, they may be less likely to seek advice or check the facts –yet our research shows that even those who describe themselves as confident are getting these facts wrong on a regular basis.
“Understanding the impact of compound interest, or the way inflation can eat into the buying power of our savings, are basic building blocks for making good financial decisions, and yet our research showed a significant proportion of consumers are not clear on the difference they can make.”
The survey also examined people’s knowledge of simple principles of investing, including the relationship between risk and reward, and the appropriateness of risk profiles according to life stage.
Nearly two thirds of respondents answered correctly when asked whether higher risk generally results in higher reward, and this rose to 71% amongst the confident. It’s also understood by over half the confident in all age groups, rising to 80% in those over 65.
Less well understood (48%), however, is that investments which carry more risk are less suitable for older people than for younger, since they have less time to make up any losses. The level of understanding is higher in those over 50, however. Among the younger age groups (under 44), only 39% showed they understood the principles of changing risk profiles in line with age, which has implications for investment decisions they are making now.
Sam Mirehouse said: “People may gain knowledge and experience in financial matters as they get older, but the financial decisions people make when they are younger have a direct impact on their financial well-being many years into the future.
“It’s important to review your financial choices at different life stages, or after life events, to make sure they are still appropriate for you.
“Fortunately, there are resources available to help people make more informed financial choices and arrive at better outcomes. Government sites include moneyhelper.org.uk and moneyandpensionsservice.org.uk. Providers also have online resources, outlining factors to consider, with links to educational, advice and guidance services, such as our own Shape my Future and Savings Calculator, for example. All will help to provide greater education and information around the fundamental way different factors can affect your finances.”
