The value of financial advice

Those who received financial advice in the 2001-2007 period had accumulated significantly more liquid financial assets and pension wealth than their unadvised equivalent peers by 2012-14.

‘The Value of Financial Advice’, produced by ILC-UK with the support of Royal London, analyses data from the largest representative survey of individual and household assets in Great Britain, the Wealth and Assets Survey. It finds that, even allowing for the fact that some groups are more likely to seek advice than others, those who received financial advice in the 2001-2007 period did better than an equivalent group who did not receive such advice, by 2012-14.

The report examines the impact of financial advice on two groups, the ‘affluent’ and the ‘just getting by’. The ‘affluent’ group is formed of a wealthier subset of people who are also more likely to have degrees, be part of a couple, and be homeowners. The ‘just getting by’ group is formed of a less wealthy subset who are more likely to have lower levels of educational attainment, be single, divorced or widowed and be renting.

‘The Value of Financial Advice’ finds that:

• The ‘affluent but advised’ accumulated on average £12,363 (or 17%) more in liquid financial assets than the affluent and non-advised group, and £30,882 (or 16%) more in pension wealth (total £43,245)

• The ‘just getting by but advised’ accumulated on average £14,036 (or 39%) more in liquid financial assets than the just getting by but non-advised group, and £25,859 (or 21%) more in pension wealth (total £39,895)

The report also finds that financial advice led to greater levels of saving and investment in the equity market:

• The ‘affluent but advised’ group were 6.7% more likely to save and 9.7% more likely to invest in the equity market than the equivalent non-advised group

• The ‘just getting by but advised’ group were 9.7% more likely to save and 10.8% more likely to invest in the equity market than the equivalent non-advised group

Those who had received advice in the 2001-2007 period also had more pension income than their peers by 2012-14:

• The ‘affluent but advised’ group earn £880 (or 16%) more per year than the equivalent non-advised group

• The ‘just getting by but advised’ group earn £713 (or 19%) more per year than the equivalent non-advised group

The report found that 9 in 10 people are satisfied with the advice received, with the clear majority deciding to go with their adviser's recommendation.

Despite the advantages of receiving advice, only 16.8% of people saw an adviser in the years 2012-2014. Indeed, ‘The Value of Financial Advice’ finds that even amongst those who took out an investment product in the last few years, around 40% didn’t take advice, rising to 78% of people who took out a personal pension.

After controlling for a range of factors, ‘The Value of Financial Advice’ concludes that the two most powerful driving forces of whether people sought advice was whether the individual trusts an Independent Financial Adviser to provide advice, and the individual’s level of financial capability. Therefore, the report makes a series of recommendations to raise demand for financial advice including:

• Using advice to support the auto-enrolled – duty on employers to ensure staff can access the best information and advice on their pensions

• Mandating default guidance for those seeking to access their pension savings – to ensure people can get crucial information in a complex marketplace and avoid worst outcomes

• Helping to create informed consumers through continued development and roll out the pensions dashboard

• Ensuring regulators continue to place emphasis on access to independent financial advice

Ben Franklin, Head of Economics of Ageing, ILC-UK said:

“Our results show that those who take advice are likely to accumulate more financial and pension wealth, supported by increased saving and investing in equity assets, while those in retirement are likely to have more income, particularly at older ages.

But the advice market is not working for everyone. A high proportion of people who take out investments and pensions do not use financial advice, while only a minority of the population has seen a financial adviser. Since advice has clear benefits for customers, it is a shame that more people do not use it. The clear challenge facing the industry, regulator and government is therefore to get more people through the “front door” in the first place.”

Source: A Research Report from ILC-UK

The cost of delay

Let your savings snowball

Making an early start is the most important factor in saving for the future.

Saving for the future can often come well down the list of financial priorities, behind paying off debts, paying a mortgage and financing a child’s education. However, the longer you put it off, the more you’ll miss out on the power of compounding returns.

Einstein reportedly stated: “Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn’t... pays it.” Most people appreciate the importance of paying off debts to avoid the interest rolling up. But the power of the compounding concept is often overlooked by those who need to create wealth for the future.

The secret of investing success lies in the way that investment returns themselves generate further gains. Reinvesting any income generated, rather than paying it out, means that returns in the next period are earned on the invested sum plus the previously accumulated income. It’s very much like a snowball effect: once it’s rolling, the more snow it collects and the bigger it gets.

Reinvesting dividends paid from company shares provides a powerful example of how compounding can boost investors’ total return. Figures from Barclays show that a notional £100 invested directly into UK shares at the end of 1945 would now be worth £10,933 in nominal terms, without the income reinvested; but would have grown to £238,690 if the dividends had been reinvested in more shares.1 However, past performance is not indicative of future performance.

The chart below illustrates just how much difference compounding could make when someone starts saving earlier. Daisy starts saving £200 a month when she is 25; Ken saves £400 a month from the age of 45. In total, they both save £96,000 by the age of 65. However, assuming an illustrative growth rate of 5%, Daisy ends up with almost twice as much as Ken due to 20 extra years of compounding returns.

Of course, these figures are examples only. The level of returns in both scenarios cannot be guaranteed and would depend on the performance of the underlying investments. They do not take into account the impact of charges and taxation which would also reduce the value of an investment.

Younger generations may nowadays face even greater financial challenges, but they have got time on their side. That’s why it also makes sense for families thinking about intergenerational planning to help children and younger adults make an early start by saving money through Junior ISAs, ISAs and pensions.

If you are telling yourself that you will put aside money for tomorrow ‘when I can afford to’ or ‘when I’m making more money’, you risk leaving it too late. But by getting into the savings habit earlier, committing to a plan and giving your money the chance to grow, a more secure financial future remains within reach.

Source: St James Place

Financial advice can benefit customers by £40,000

New research shows those customers who receive financial advice can be better off on average by £40,000.

We've sponsored a research project with the International Longevity Centre – UK (ILC-UK) to produce ‘The Value of Financial Advice’ report. This independent report demonstrates that customers who take financial advice can on average be £40,000 better off than those who don’t take advice.

The report analysed data between specific time periods across a range of different individual and household assets in Great Britain and examines the impact of financial advice on two groups; those who are ‘affluent’ and those who are ‘just getting by’.

The ‘affluent’ group has been identified as those who are more likely to have degrees, be part of a couple and a homeowner. Whereas the ‘just getting by’, are more likely to have lower levels of educational attainment, to be single, divorced or widowed and rent a property. Here’s some of the findings from the report:

When the ‘affluent’ group received financial advice on average they accumulated:

• £12,363 (17%) more in liquid financial assets

• £30,882 (16%) more in pension wealth

• A total of £43,245 more,than those who were also deemed to still be affluent but didn’t receive any financial advice

The report also identified that 6.7% of this group were more likely to save and 9.7% were more likely to invest in the equity market compared to those that didn’t receive financial advice.

Whereas, those within the ‘just getting by’ group who did received advice, on average accumulated:

• £14,036 (39%) more in liquid financial assets

• £25,859 (29%) more in pension wealth

• A total of £39,895 more, than those who were also in this group and didn’t receive financial advice

This time round 9.7% of this group were more likely to save and 10.8% were more likely to invest in the equity market that the equivalent of those who were in this group but didn’t receive any financial advice.

Here’s what Steve Webb our Director of Policy, had to say about the report:

“This powerful research shows for the first time the very real return to obtaining expert financial advice. What is most striking is that the proportionate impact is largest for those on more modest incomes. Financial advice need not be the preserve of the better off but can make a real difference to the quality of life in retirement of people on lower incomes as well. The evidence shows that when people take advice they are overwhelmingly satisfied and benefit as a result. More needs therefore to be done to overcome the barriers to advice.”

Source: Royal London

What is attitude to risk? (ATR)

Everyone has a different attitude to risk and their attitude to risk may/will vary over their lifetime, most of us becoming more risk adverse as we get older. In simple terms on a scale of 1 to 10, if 1 is putting your money in a tin box under your bed then typically Australian mining shares would be 10. Although there is always a risk to the tin box!

Choosing the right investments means balancing how much you are prepared to lose with how much you hope to earn.

This means understanding risk and your attitude to risk – how much risk you are prepared to take with your money and assets in a particular time-frame.

This can be affected by many factors, including your personal situation, age, goals and the current economic climate.

Where have you heard about attitude to risk?

If you talk to a financial adviser they should ask you about how much risk you are prepared to take with your money. You may also find questions about attitude to risk on investment applications forms or online investment platforms.

What you need to know about attitude to risk...

Usually, the higher the risk you are willing to take, the higher the potential returns could be – but equally, the higher the risk of losing your money too.

Low risk investments are likely to offer lower rewards, but have less risk attached too. You have to choose the options you are comfortable with.

Your attitude to risk can of course change over time. You might become much less risk averse if you came into a big sum of money, for example, or much more risk averse if you start to have a family and need to think about securing your children's future too.

Nine million UK mid-life employees flying blind into retirement

 8.9 million employees aged 45 and over do not know how much they will need to save for a comfortable retirement while 5.1 million do not know how much they have already saved in their pension.

•  Mid-life employees are calling on their employer for more support.

• Aviva analysis shows it’s never too late to save, with the average UK employee aged 45 potentially able to generate a pension pot of more than £50,000 by the time they retire at 65 from a standing start.

Millions of mid-life UK employees are sleepwalking into retirement, according to new research from Aviva UK.

The study, which looked into mid-life employees’ financial preparedness for later life, revealed 64% of employees aged 45 and over - the equivalent of nearly nine million people - do not know how much they will need to save to afford a comfortable retirement.

In addition, over five million mid-life employees (37%) do not know how much is already saved in their pension. Question marks also hang over the state pension with two in five (43%) respondents unaware of how much support they will receive from government. A further 26% do not know at what age they’ll be eligible for the state pension.

With the full new state pension currently valued at £168.80 per week, this adds up to a retirement income of £8,777.60 per year.

Table 1: Percentage of employees aged 45+ that do not know the following information

		% of UK employees aged 45+		Number of UK employees aged 45+
The age at which I will qualify for the state pension		26%		3.6m
How many pension pots I have		35%		4.9m
How much I have currently saved in my private pension(s), if anything		37%		5.1m
What type of private pension scheme I have		37%		5.1m
How much my employer contributes towards my current private pension		36%		5m
The state pension provision		43%		6m
What the pension freedoms mean for me		62%		8.6m
How much I need to save before I can retire comfortably with the lifestyle I want		64%		8.9m

Most employees (62%) aged 45+ do not know what the pension freedoms mean for them, while 37% do not know what type of pension scheme they have – for example whether it’s a defined contribution or defined benefit scheme.

Never too late to save

However, the analysis also highlights it is never too late to save. Based on the average UK salary of £28,000, Aviva calculates that an employee aged 45 today with no savings to date could build a pension pot of £56,100 by the time they reach 65, based on the current minimum employee and employer pension contributions under auto-enrolment alone (a combined 8% of annual pensionable earnings). 

Table 2: Projected value of savings for average employee by retirement age of 65

* It’s important to note that these figures are based on assumed charges and rates of growth, which are not guaranteed. The value of investments can go down as well as up and employees may get back less than has been paid in.

Starting age Amount saved by Amount contributed Projected value of

employee (5%) by employer (3%) pension @ 65 Invest. Growth 2.4%

45 £21,840 £13,200 £56,100

50 £16,380 £9,900 £39,600

55 £10,920 £6,600 £25,500

60 £5,460 £3,300 £13,600

Employers seen as an important source of financial guidance

Most employees surveyed see their employer as a critical source of financial help in navigating the uncertainty around their pensions, with two thirds (65%) believing their employer should provide support around employees’ pensions.

Lindsey Rix, Managing Director of Savings and Retirement at Aviva comments: 

“Millions of mid-life employees are flying blind, and fast, towards their retirement. At the same time these employees are calling upon their employers for help.

Without a clear picture of what they currently have saved or might need to save for a comfortable retirement, our findings show many UK employees are approaching retirement with their eyes closed – with no realistic idea of how near or far they are from their destination. “As a first step, mid-life employees who are mystified by their pension savings should try to get a clear picture of what they have saved so far and how much of an income this can provide them with over the course of retirement.

For some, this may be a pleasant surprise, while for others, it could be the wake-up call that’s needed to spur them to take action. People whose pensions are in need of a boost shouldn’t be disheartened, however, as it’s never too late to save.”

Top tips to help demystify pensions for mid-life employees:

• Understand where you start – before considering your plans for tomorrow it’s important to understand where you stand today. Look into your current pension savings and policy and research when you’ll be eligible for the state pension, and how much support you’ll receive
  

• Take advantage of your workplace pension – all employers are legally required to provide a workplace pension, if we save, our employer must save with us too
  

• Track down your pensions – moving jobs more frequently means amassing more pension pots. It can be hard to keep track of different pots, however the government offers a pension tracing service to help you track down any mystery pots
  

• Take advantage of online planning tools - Aviva’s Shape my Future tool can give you an idea of what your retirement income might be based on your current saving habits and let you see the possible effects of making changes
  

  Find out if there’s financial guidance available at your workplace - many employers offer employees sessions with financial advisers, it’s therefore worth checking if your employer already has these initiatives in place. Some organisations such as Aviva have introduced Mid-Life MOTs for their employees, to help employees in this age group to consider their wealth alongside their work and well being

• Take professional financial advice - as the decisions you make at this time are of paramount importance to your future lifestyle.

Source: Aviva