Are you on the money?

New research by Ipsos MORI and King’s College London shows that people have significant misconceptions about personal finance. When it comes to the big events in life, like having children, going to university and retiring, we tend to underestimate the true cost, often to a considerable degree.

The cost of raising a family
When asked the likely cost of raising a child to 21, the average guess was £50,000. The actual cost has been calculated at more than 4 times that amount at £229,000[i]. This finding is more surprising when you consider that the average guess among those living with children was only £40,000.

The cost of a university education
The survey showed that people think that today’s students leave university with debts of £21,000 including tuition fees. However, the actual figure according to a recent study is £44,000[ii]. As might be expected, when those aged 16-24 were asked, they came up with a more accurate but still too low figure of £30,000.

Saving for retirement
When asked, people estimated that they would need to accumulate £124,000 in a private pension in order to receive a pension of £25,000 a year in retirement, including the full state pension. However, using a pension calculator would show that currently the figure would need to be around three times that amount[iii]. Alarmingly, younger people are more likely to underestimate how much they need to save for a comfortable retirement. Over half of those questioned aged under 35 think they would need less than £100,000 to secure a pension of that amount.

Buying a home
Given the media’s continuing focus on house prices, when it came to the average cost of a house in the UK, the public estimate was £190,000; very close the figure of £195,166 as shown in Nationwide’s May 2015 house price survey. However, when it came to the average deposit, respondents thought that a figure of £20,000 would be sufficient. In fact the average figure for a first-time buyer’s deposit would be around £27,719[iv]. Turning to the Bank of England base rate, 49% correctly identified the rate as 0.5%. But when asked what the average rate has been over the past 40 years, most people estimate this figure at 4% when in fact the figure is 7%. Research has highlighted other blind spots. A recent survey conducted by the Principality Building Society showed that less than half the borrowers they asked knew what rate of mortgage interest they were currently paying.

i. Centre for Economics and Business Research
ii. The Institute for Fiscal Studies
iii. This is Money pensions calculator
iv. The Council of Mortgage Lenders – August 2014

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The value of pension and investments can fall as well as rise. You may get back less than you invested.

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