A new Scottish Widows study has stated that almost two million younger people could have an extra £7,000 a year in retirement income, through a series of small behavioural ‘nudges’.
Getting young people to picture their ‘future self’ and introducing simpler pension labels to link contribution levels and retirement income, were just two small changes that were shown to boost future retirement savings by up to £142,450 amongst those under the age of 30.
Scottish Widows recently teamed up with the Behavioural Insights Team (BIT) to understand what motivates younger people to save more.
The study included psychological testing by BIT with around 3,000 22-29-year-olds across the UK to learn more about their attitudes, confidence and expectations around their future finances.
The experiment tested different approaches in an attempt to identify what small ‘nudges’ would make the biggest difference to those who had pointed to a lack of awareness of pensions and information on how to change their contributions. The study showed:
- Labelling makes a difference: By including tangible explanations such as ‘a 12% contribution would keep you above the poverty line’ and ‘a 15% contribution would allow for a comfortable retirement’, twice as many young people would recommend almost doubling pension contributions from the default minimum of 8% to 15%.
- Reframing investments over savings When participants were asked how much to ‘invest’ in their pension as opposed to how much they should ‘save’ – the amount they recommend someone puts aside shot up by a third (34%).
- Prompts drive engagement: Once young people start actively thinking about their future, they’ll care more about their retirement prospects. After answering a set of questions about where they see themselves in the future, the number of participants who want to raise their pension contributions increased by 11%, equivalent to 800,000 young people saving more.
Pete Glancy, head of policy at Scottish Widows, said: “Young people are faced with a unique set of challenges when it comes to saving for retirement. One of these is perception. They can often think of their ‘future self’ as a different person and so may prefer holding on to their income for more immediate priorities, like a first home deposit, rather than saving for someone they perceive as a stranger. That’s why we previously created an ‘Age Me’ app, so people could look their older, future self in the eye.
“We’re now exploring behavioural science and nudge theory, which we know can play an important role in helping people to save for their future. Combined with more systemic reforms to the pensions landscape – such as the removal of the minimum earning threshold – this experiment shows that small interventions could be instrumental in making big changes to the way young people save for retirement.
“We’re looking at how this study can be used to help get more people saving, and we are sharing the results with the industry, stakeholders and charities because real progress can only be made if we work with others to tackle this complex challenge.”