How we are juggling pensions, savings and investments: mind the resilience gaps

Susannah Streeter: Hello and welcome to Switch Your Money On from Hargreaves Lansdown. It’s a really busy morning here in the studio with me, Susannah Streeter – Head of Money and Markets.

Sarah Coles: And me, Sarah Coles – Head of Personal Finance – and a host of other guests for the podcast.

Susannah Streeter: Yes – it really is all hands on deck because we’ve just released a major piece of research – the HL Savings and Resilience Barometer – with insights into how the nation is faring when it comes to everything from investments, to pensions, to debt.

Sarah Coles: And we want to explore it in more detail – looking at where the gaps in our resilience are opening up – and examining some of the findings around investment and pensions, and raising the question of whether – for some people – the cost-of-living crisis may be easing. It’s in an episode we’re calling ‘Mind the Resilience Gaps.’

Susannah Streeter: Nathan Long is here – who’s a Senior Analyst at Hargreaves Lansdown. He’s been instrumental in putting all of this research together – alongside Oxford Economics – and he’s here to talk about the overall findings.

It has been a bit of a labour of love, hasn’t it?

Nathan Long: It sure has – it’s something we’re committed to doing every six months, and we’ve just put out the fifth edition of this work. We’ve actually been following how people’s finances have coped since the pandemic and there are a few particularly striking things emerging from this data.

Sarah Coles: It’ll be great to catch up a bit later in the podcast. We’ll also be speaking to Helen Morrisey – our Head of Retirement Analysis – about some of the really alarming figures emerging relating to pensions and retirement.

Susannah Streeter: Yes – and then we will explore the investment findings in depth – and the ways in which people can address some of the issues that have emerged – with Sophie Lund-Yates, our Lead Equity Analyst.

Sarah Coles: But let’s start with a snapshot of the economic picture that these findings are reflecting.

Susannah Streeter: It does seem clear that plenty of people are struggling amid cost-of-living headwinds and are having to make some big choices when it comes to spending.

It’s no surprise that the discount chains, Aldi and Lidl, have seen a surge in sales recently.

Sarah Coles: Yes – Kantar data shows that the discounters, Aldi and Lidl, saw the sharpest rise in sales, but Sainsbury’s and Tesco weren’t far behind – and that’s thanks to their price-cutting drives. Lidl saw sales rise the most by almost 14%, as its price promotions persuaded customers to pile trollies high.

Other industry data showed that Marks and Spencer saw food sales nudge up by just over 12%, with its core customers considered to be more insulated from cost-of-living headwinds.

Susannah Streeter: Inflation fell faster than expected in the autumn, but it surprised the market in December by rising and – with interest rates high and uncertainty over when a cut will come in 2024 – consumers are still showing signs of being more cautious. We might be having to spend more – due to rising prices – but, in volume terms, we’re buying less.

The shine is coming off big-brand power, with JD Sports seeing sales growth decline, as customers turned more wary. The share price fell steeply after the company issued a profit warning. Burberry is also having a tougher time, as it issued another profit warning after sales fell back.

Sarah Coles: Next has managed to avoid so much discounting – which helped it unwrap some festive results which were ahead of expectations – and that led it to upgrade its profit forecast. But Next has also joined other retailers in warning there could be delays to goods arriving on the shelves caused by re-routing of ships due to violence in the Red Sea. The threat of supply chain snarl-ups is set to be a risk once again, and that’s adding to concerns about stubborn inflation.

Susannah Streeter: However, financial markets are still flagging the potential for interest rate cuts in 2024, with some forecasters suggesting the Bank of England may bring forward the first interest rate cut to as early as this spring – despite policymakers having warned that rates may have to stay elevated for an extended period of time. Although the economy grew in November, the increase in GDP cancelled out October’s decline, so stagnation still appears to be the order of the day.

Sarah Coles: But, with the better mortgage deals landing this month, it does appear to be helping the housing market a bit, with Rightmove flagging a positive start to the year. Asking prices were 1.3% higher on January 6th compared to the beginning of December – more than double the average increase for this time of year – showing that agents and sellers were looking more optimistic about demand.

Susannah Streeter: Even so, there are still forecasts that we are likely to see house prices either decline or stay pretty flat this year as more people come off super-cheap deals and face much larger monthly payments.

So, how are all of these developments affecting our financial resilience? Let’s bring in Nathan Long.

Nathan, can you start by telling us a bit more about the Barometer – what it does – what it shows?

Nathan Long: This is a huge piece of analysis – and we do it every six months in partnership with Oxford Economics – and we’re bringing together big, official datasets and using statistical modelling to build a picture of people’s financial resilience – from how much savings they have to whether they’re on track for a reasonable retirement income. It gives us an overall picture of whether we are getting stronger or losing resilience, and tells us where people are vulnerable – and about the gaps in their finances.

It's structured around the five fundamental pillars of our finances. These are: controlling your debts, protecting your family, saving for a rainy day, planning for later life, and investing to make more of your money.

Sarah Coles: So, it’s a huge piece of research – can you tell us about the overall findings this time?

Nathan Long: Overall, life got harder in 2023 – and that’s dealt a real blow to our financial resilience. The Barometer looks at how we’re going with each of those pillars to produce an overall score out of 100 – to measure the resilience of the nation. In 2023, overall resilience fell by half a point to 60.9. It’s still above pre-pandemic levels, but a third of that pandemic gain has been wiped out.

Relentlessly-rising prices for well over a year have taken a toll. It can be difficult to see the overall impact of rising prices when we look at today’s inflation figure – however, the Barometer shows us that the cost of living has actually increased by a fifth in the past two years.

This hasn’t been felt evenly across the income spectrum – so the resilience gap between higher and lower earners is widening. If we take higher earners, life has actually been getting easier. The highest fifth of earners have seen the proportion scoring ‘Good’ or ‘Great’ for their overall financial resilience rise from 77% in 2019 to 86% at the end of 2023. Meanwhile, if we look at lower earners – they’re still being clobbered by the cost-of-living crisis, and the lowest fifth of earners with ‘Good’ or ‘Great’ scores fell from only 3% to 2% - so a big difference there.

Susannah: That is really stark – so why has this gap been opening up?

Nathan Long: Some of this goes back to the pandemic. Lower earners were less able to build up lockdown savings. They were also less likely to have investments or own property – both of which increased in value – so, by the end of the peak of the pandemic, they were worse off.

As we emerged from one crisis – and we were plunged into another – we then got hit by the cost-of-living crisis and that’s taken a toll on the resilience of lower earners too. They already had less room in their budgets, but were also hit harder by rises in the cost of essentials – particularly things like cost of food and non-alcoholic drinks, which were up by around a quarter.

Sarah Coles: Those prices really have been rising quite spectacularly. What impact has this had on lower earners?

Nathan Long: Increasingly, we’ve seen that they’ve spent any savings that they had and also cut back on almost every non-essential cost that they’ve got. They’ve run out of road – and the debt position of lower earners has deteriorated massively since the onset of the pandemic – while, for everyone else, it’s actually improved. The debt scores for those on the lowest incomes are significantly worse – they fell by 3 points compared to a 2-point rise in the debt scores of the highest earners. Debt anxiety and arears are the key areas of concern for this group.

Susannah Streeter: What about the higher earners – is the cost-of-living crisis really easing for this group now?

Nathan Long: To a certain extent, this group hasn’t faced quite the same pressures – and it looks like life could ease a little in 2024. Real disposable income is expected to grow – although it’s not going to shoot the lights out – but some of the things which will make life easier will particularly benefit higher earners.

So, if you take the National Insurance cut – once you factor in the fact that the income tax and NI thresholds have been frozen – the average earner is actually £13 better off. Lower earners are actually worse off – but, if you compare that to someone earning £50,000 a year, they’re likely to be around £473 a year better off. It’s one of the reasons why the savings rate is expected to be higher in 2024.

Sarah Coles: In terms of the other findings, what else was particularly interesting?

Nathan Long: One of the things this piece of work does is to drill down into each of those five pillars that I mentioned – to look more closely at how resilient people are in these areas – and, most importantly, to find out what’s driving it. I think the figures around the weakening of our pensions resilience – and what lies behind it – are particularly interesting.

Susannah Streeter: Okay, Nathan – thank you so much. The findings are always really interesting, so we’re gonna watch very closely to see what happens in terms of this resilience gap in the coming months – when the next edition of the Barometer is released.

Sarah Coles: With pensions resilience in mind, let’s bring Helen Morrissey in. She’s been looking at the retirement resilience scores.

So, Helen, what are your key takeaways from this issue of the Barometer?

Helen Morrissey: As Nathan has already said, our finances have taken a real battering with the cost-of-living crisis and this has fed through to our retirement resilience. Only 39% of people are on track for a moderate retirement income and ongoing turmoil looks set to make life even more difficult in 2024.

Susannah Streeter: 39% is a low number – why is this the case?

Helen Morrissey: There’s a few reasons. First and foremost, high inflation has pushed up the amount needed to fund a moderate retirement income. Added to this, asset values have not grown enough to make up the difference, so this leaves us needing to save more at a time when we have precious little spare cash to put away. Younger people will, of course, have more time to make up the difference but, for those who are nearing retirement, many may struggle to make up the gap.

Sarah Coles: But at least inflation is starting to come down – and that should make things a bit easier, shouldn’t it?

Helen Morrissey: Yes, it will help, though it’s fair to say that it still remains significantly above the Bank of England’s 2% target and we will see the amount that we need to save for retirement continue to grow. However – looking ahead – we also need to factor in what’s going on in the housing market. We’ve seen some real turbulence over the past year and falling house prices will have an effect on people’s overall retirement resilience – particularly those who are more middle earners.

Susannah Streeter: Can you tell us a little bit more about this – and what effect it could have?

Helen Morrissey: Of course – in this issue of the Barometer, we model the impact of a 5.9% fall in house prices during 2024. Such a fall would have an impact across the board, but it would particularly affect middle earners, who typically hold lower equity shares in their property, and so are more vulnerable to falls in property prices.

Retirement resilience scores for the third- and fourth-income quintile groups are expected to deteriorate by 1.6 and 1.9 points respectively. This compares to a 1.1-point reduction for the highest earners.

Home ownership is an important component of overall retirement resilience – in that owning a home outright reduces your day-to-day expenses compared to those of renters – and it also gives you an asset from which to take income if needed.

Sarah Coles: It sounds like the pressure on our financial resilience isn’t going to let up any time soon.

What would you say to people who are worried about their retirement planning right now?

Helen Morrissey: It’s important to say that planning for retirement is a long-term game – and, though current circumstances are difficult, things do change for the better. It’s important that those who are able to save for the long term – through their pensions – continue to do so wherever possible. It is precisely this regular drip feed of contributions over the long term that help you to build your financial resilience. If the financial strain of contributing to pensions has been too much, then it’s important to resume these contributions as soon as is practical for you.

Sarah Coles: Thanks, Helen. It’s easy for us to focus on the here-and-now in tougher times, and it’s clear how important it is to look ahead to the future.

Investing to make more of your money is clearly part of this picture, but we wanted to look a bit more closely at the investment part of the Barometer – because there were also some interesting findings when we looked more broadly at the resilience of some of those who started investing for the first time during the pandemic.

Susannah Streeter: Yes – during lockdowns, investment fever gripped the nation. For those who finally had the time to get to grips with investing – and were in the right position, financially – this will have been a life-changing step, setting them on the path of long-term financial resilience. However, others were tempted to take the plunge into risky waters of things like crypto and meme-stocks – without the lifeboat of emergency savings – and it could have done them more harm than good.

Sarah Coles: Investing took off amongst lower earners and young people. The Barometer gives households an investment score by looking at how they use the cash they have left over at the end of the month, and whether they save or invest it. During the pandemic – as more people invested across the board – these investment scores rose. However, among young people and lower earners, it was particularly striking.

Susannah Streeter: Unfortunately – in some cases – this will have left serious gaps in their resilience elsewhere in their finances. Among those on the lowest fifth of incomes, only around a quarter had enough emergency savings – which is measured as at least three months’ worth of essential spending. Similarly, fewer than a third of those aged 20-24 have enough emergency savings, and around half of those aged 25-30.

Sarah Coles: Lockdown savings offered an opportunity to build those cash buffers, and those who invested before doing so risked needing to dip into their investments when they’re hit by the unexpected. Investing should only be considered for periods of 5-10 years or more, so it isn’t a sensible home for short-term emergency savings.

Susannah Streeter: The other concern is that, among pandemic investors, there’s a risk they joined fashionable trends at the time, including crypto-currency and meme-stocks. Neither of these are the kinds of sensible, diversified investment strategies that build value over time.

Crypto has no intrinsic value – and is based purely on what someone else will pay for it on any given day – so has far more in common with gambling than investing. As such, you need to be prepared to lose all the money you put into these currencies if sentiment goes against you.

Meme-stocks, meanwhile, rose on hype, then fell – leaving many people stranded. HL included warnings to investors browsing meme-stocks on its website at the time, highlighting they were particularly risky options. Since the onset of the pandemic, we’ve also been running a ‘Better Investors’ programme, contacting clients and encouraging good investor behaviour.

While it is brilliant that so many people explored investments during the pandemic, there are clearly more balanced ways for people to get started than through meme-stocks and crypto-currency.

Let’s bring in Sophie Lund-Yates to chat about this and look at some of the best first steps to take when investing.

So, just tell us about these first steps – they are really useful reminders for all investors, aren’t they?

Sophie Lund-Yates: Thanks, Susannah – I’d certainly say so.

We know that the barometer has highlighted that younger people might lean towards the wrong type of investment, and a negative first experience can put young people off investing in the future. But, of course, we still know that it’s important to invest as early as possible.

As a team, we often talk about the crucial role diversification plays for early investors.

Sarah Coles: We certainly do!

Sophie Lund-Yates: [Laughs] It’s a bit of a golden rule because, by diversifying, you’ve spread your money between different investment types to reduce the overall impact of risk when investing.

Sarah Coles: It’s interesting to look at this through a perspective of stocks and funds.

Sophie Lund-Yates: Yes – diversification doesn’t mean investing in a handful of stocks. Individual companies carry more risk – so funds are a more convenient and cost-effective way to diversify. A fund is an investment that pools together money from lots of individuals, and the fund manager then invests the money in a wide range of investments like UK shares, overseas shares – or even bonds.

With money spread over lots of different assets, risk is also spread. So, if the value of one goes down, the others help pick up the slack.

Susannah Streeter: Yes – it’s really important to highlight that there are different ways to diversify – not just types of companies, but geographically as well.

Sophie Lund-Yates: The basics really are to, number one, think globally – so that’s not being overly exposed to one area. It’s important to spread your investments across a broad range of regions to stand the best chance of smoothing performance out. And the other side of the coin is to think about different types. As you say, investments types don’t always perform the same – that’s why it’s usually best to have a mix. Shares, for example, generally offer more reward, but they are more volatile than other assets like bonds.

Sarah Coles: I think we’re all agreed – diversification is key. What else do people need to think about?

Sophie Lund-Yates: The second golden rule of investing is to suss out your level of risk.

Susannah Streeter: So, you might be keen on bungee jumping, but that doesn’t mean [laughs] you should jump feet-first into riskier investments!

Sophie Lund-Yates: Yes – risk levels will be different for everyone, but it is a pivotal first step before taking the plunge and investing. Risk is all about trying to find the right balance between risk and reward as it fits within your personal circumstances and financial goals.

Risk preferences will change depending on things like your existing financial resilience – so things like rainy-day savings, as well as your time horizon – so that’s how long you have to grow your investments over time.

Sarah Coles: I suppose another way to think of risk is that it’s essentially another term for market ups and downs – so it doesn’t make sense to take on riskier, or more volatile assets, if your time horizon is short.

Sophie Lund-Yates: Exactly – but, over the long term, good investments can go up in value – and, as long as you’re willing to be patient, we know that many investments have paid investors back over the long term. As I said, there can be ups and downs along the way and you could get back less than you invest.

Sarah Coles: As always, time is a big factor – particularly when it comes to the moment you decide to start to invest.

Sophie Lund-Yates: The key thing is to take the time to get to grips with investment. We always talk about the importance of understanding what you invest in, especially when it comes to individual company shares – and very sorry for anyone that’s heard me say this before – but, if you can’t explain how a company makes its money, then you shouldn’t buy the shares.

Susannah Streeter: Precisely – and we’re seeing that a lot of younger investors are getting their information from social media. Now, on one hand, it is great that younger people want to get involved in investing – and are showing interest – but TikTok – or your mate down the pub – are not really where [laughs] you should be looking for investment inspiration!

Sophie Lund-Yates: Exactly right – so I’d really encourage newer investors to take advantage of our brilliant in-house research by signing up to our ‘Share and Fund’ insight emails, or taking a look around our ‘Learn’ pages – on the ‘Home’ page – which have heaps of information on investing basics.

Or, in the case of shares – even having a poke around a company’s annual report. These are readily available on corporate websites, and they explain a company’s business model, financial position – threats and opportunities – in an accessible way.

Sarah Coles: I know you could chat about the joys of annual reports all day – but, given we don’t have that much time, I think it’s important to end on a slightly different note.

Essentially, for those who have a comfortable level of financial resilience – so I’m talking about people who have higher than average incomes – is now a reasonable time to invest?

Sophie Lund-Yates: Yes – it could be. Specifically, when we look to the UK and some corners of Europe, valuations are looking reasonably compelling, and that suggests there could be opportunity for investors prepared to take a long-term view – although, of course, there are no guarantees.

It’s definitely been a dynamic time for markets over the last 12 months – and we’re not exactly clear of geopolitical tension and the direction of travel for that – so there is a lot to monitor.

Susannah Streeter: There certainly is.

Thank you very much, Sophie – some really useful thoughts there.

You’re listening to Switch Your Money On from Hargreaves Lansdown – and, before we go, there’s time for a quick stat of the week.

And, unsurprisingly, this one has been taken from the Barometer. Now, Sarah, I know you’ve been steeped in Barometer data, so this is a real test for you. You should remember this one!

The Barometer rates overall scores from ‘Very poor’ to ‘Great.’ It also divides this a huge number of ways – including family types.

So, among couples living on their own – impressively, more than two-thirds score either ‘Great’ or ‘Good.’ So, what about if you add children into the mix? What do you think it does to the score?

Sarah Coles: I know – from personal experience – that it brings it down significantly. Could it be as low as about half?

Susannah Streeter: I know we do both have quite a lot of experience in this field! – and, yes, you are right – you’re on a roll. That’s two in a row you’ve got right. Even more strikingly, when you look at single parents, the number scoring ‘Good’ or ‘Great’ is only just above 10% -- which is even lower than the score for single people living on their own.

Sarah Coles: I’m not surprised. I do remember my single-parenting days – they were nothing other than a financial slog. Mind you, even today, my kids are an impressive drain on my finances.

Susannah Streeter: Yes – who knew teenagers needed to eat about twice the normal amount of food?

Well, that’s all from us for this time – but, before we go, we do need to remind you that this was recorded on 23 January 2024 and all information was correct at the time of recording.

Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest, and past performance is not a guide to the future.

Susannah Streeter: This is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

Sarah Coles: This hasn’t been prepared in accordance with legal requirements designed to promote independence of investment research and is considered a marketing communication.

Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research – however, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full non-independent research disclosure on our website for more information. All that’s left is for me to thank our guests – Nathan, Helen, and Sophie, and our Producer, Elizabeth Hotson.

Susannah Streeter: And you, of course, Sarah!

Sarah Coles: [Laughs]

Susannah Streeter: Thanks very much for listening. We’ll be back again soon – goodbye!