On the money? Misperceptions and personal finance

New research by Ipsos and King's College London shows that the public have a number of significant misperceptions about personal and public finances.

New research by Ipsos 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 which 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[i] 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[ii]. 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)[iii].

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[iv]. 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[v]), 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[vi]. 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%)[vii].  

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[viii]. 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[ix]. 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[x].

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[xi].

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 of 49p[xii].  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 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 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.’

Notes to Editors:

Technical note:

  • Fieldwork was conducted between 5 to 9 June 2015
  • In total, 1100 interviews were conducted using i:Omnibus – Ipsos’s online panel.  All questions include all respondents unless otherwise stated (all adults aged 16-75).
  • All questions required only one response and where an amount is asked, respondents were asked to write in an exact value (unless specified): the banding has been added at the analysis stage for ease of interpretation.
  • The results have been weighted to reflect the known profile of the adult population in Great Britain. They are weighted on age, gender, social grade, region and work status.
  • Averages where specified refer to the median value (that is the response from the respondent in the middle of a ranked distribution)[xiii].

[i] By which we mean the median value, that is the response from the respondent in the middle of a ranked distribution.

[ii] The average cost to raise a child to the age of 21 in Great Britain is £229,215 according to LV= Insurance company’s ‘Cost of a Child’ report. The data are compiled on its behalf by the Centre for Business and Economic Research (PDF).

[iii] The average cost for 25 hours of nursery care for a child under the age of two is £115.45 per week according to the 2015 Childcare Costs Survey (PDF) conducted by the Family and Parenting Trust.

[iv] On average, a student will leave University with £44,000 debt. Data are compiled and analysed by the Institute for Fiscal Studies on behalf of the Sutton Trust.

[v] Average pensioner income is £25,281. Data are sourced from the Pensioners Income Series (2012/13) published by Department of Work and Pensions.

[vi] The This is Money pensions calculator suggests that you need over £400,000 to get the average pensioner income - c.£25,000 a year (see footnote iv for source).

This calculation assumes that an individual will buy an annuity with their pension funds and that the rate for this is £6,000 for every £100,000 saved. However, it does not take the state pension into account. Assuming an individual was claiming the full state pension paid at the current rate (£6,145.35 a year) then this would mean that their private pension fund would need to provide them with an income of £18,854 a year. Based on the same annuity rate, this would require an individual to have £314,879 saved.  

[vii] An estimated 43% of working age people are facing inadequate retirement incomes according to Department for Work and Pensions (August 2014 report)

This is the latest estimate from DWP on the proportion undersaving. The analysis excludes certain groups in the working age population, including people aged under 22 and those with no earnings from 50 to State pension.

“Inadequate retirement income” is defined in terms of replacement rates. Replacement rates are defined as income in retirement expressed as a proportion of income before retirement. The UK Pensions Commission set out target replacement rates per income band in their 2004 report. Individuals who are estimated to have incomes in retirement below the Pensions Commission target replacement rates are said to have an “inadequate retirement income” or be “under savers”.

[viii] The average figure for May 2015 is £195,166. Data are drawn from Nationwide’s house purchase mortgage lending at the post survey approvals stage. Data are also seasonally adjusted, and can be found on the Nationwide web site (PDF).

[ix] The average figure is £72,302. Data are taken from the National Mortgage Index released by the Mortgage Advice Bureau.

[x] The average figure is £27,200 based on the latest Office of National Statistics (ONS) data.

[xi] The top 1% are expected to contribute 27.5% of the government income tax revenue. Data can be found on GOV.UK.

[xii] According to data from MySuperMarket, the price of a pint of milk as of 26th June 2015 was 49p in Morrisons, Waitrose, Asda and Tesco.

[xiii] As the data includes some outliers, the median value was chosen over the mean as a representative of the centre of the data. Median values, unlike the mean, are unaffected by outlying measurements.

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