185. Why Future Generations Face Disaster in Retirement

0:00Monzo Business is the proud partner of The Rest is Money. Now, did you know that over 600 ,000 businesses are already banking with Monzo Business? And mine is one of them. To celebrate us teaming up, we've got a special offer for you. New customers get Monzo Business Pro or team for free for the first six months. Just head to monzo.com slash the rest is money to claim it for your business. Now, maybe you run your own company and you're looking for a bank with the solutions to make your financial admin easier, like expense cards. that help your team serve loads of time as your business grows. Just go to monzola.com forward slash the rest is money to learn more about the special offer and find out which of their plans is right for you.

0:46Offer is available to new Monzola business customers only for either Pro or Team plan. Offer ends on the 31st of July 2025. After the offer period ends, Pro will be£9 a month and Team from£25 a month. Expense cards are only available with Team. Only sole traders or limited company directors in the UK can apply. T's and C's apply.

1:37hello and welcome to the rest is money with me robert perston and me steph mcgovern and also with us today back by popular demand karen ward chief market strategist at jp morgan asset management karen thank you for coming back to have a chat with us absolute pleasure different topic today i'm excited about talking about this one yeah and it is it is an issue that's matters to everybody and certainly it's one that's on our minds. You've done some research about British people's attitudes towards retirement and in particular saving for retirement, which, you know, many of us would say, you know, JP Morgan got its fingers in lots of pies but it felt like a bit of a departure what motivated you to do this and what did you learn yeah great question as if I'm not busy enough eh Robert with all that is going on in the world I just decided to embark on this little sort of side hustle passion project the way it came about was partly you know there are times in your life where what you're doing professionally kind of collides with something that's just going on in your broader life and the last few months has been one of those So, you know, in my professional work, something interesting is happening in the UK, showing up in the UK data.

2:56And that is that we're saving a bit more in the UK. We traditionally have been a nation a little bit like the US, a bit sort of live for the moment, spend as much as we can. And we haven't traditionally been a particularly high saving nation. In fact, I saw some data on this yesterday and it's only the UK that spends as much of its income as America does. Traditionally. But that's what's changed post-pandemic. So we now, our savings rate is running at 12%. We are saving suddenly more than Germany. Germany traditionally have been the very high saving nation so so we're suddenly saving a bit more now where the economic story starts to unravel is you would think that if households are saving more that provides money capital to businesses and what you'd hope to see therefore is that as households are saving a bit more that money starts to get channeled into businesses and they invest more and then all sorts of good things happen like productivity and the economy grows even though households aren't spending as much.

4:06But that's where the story sort of falls apart in that we aren't seeing that pickup in business investment. We aren't seeing the productivity, the growth on the back of it. Was your initial instinct, the government's got to do more to persuade people to, you know, if we want to get the economy growing faster, we've been bumping along the bottom. Did you originally think actually the thing to do is just to get us back to our old bad habits of spending more? That I think certainly is tempting for governments to think about. Let's try and get people spending that cash just to get that short term growth kick.

4:39But as I say, there was this sort of private aspect of my life that also motivated me with this whole project in that, you know, I'm reaching that stage of my life where various family members around me are reaching age where they suddenly need a little bit more support and a bit more care and and the realities of going into that stage of your life seeing the cost of it seeing you know how pension pots and wealth aren't living up to what you'd hope to pay for it and then the challenges that that creates for the entire family structure really hit home so basically I'm, you know, I'm sat there looking at the data and then I'm going home and dealing with all these challenges.

5:18So this was what motivated me. And I thought, I need to understand what's going on in these savings. How are people saving? Where are they putting the money? Are they equipping themselves to have the kind of retirement, the kind of late stage life that members of my family are not looking at? So that was the motivation. So what we did and, you know, thanks to JP Morgan Asset Management, my company who sort of gave me the resources to go off and do this. We did a survey of the UK population just to delve into that question of you seem to be saving more. Where are you saving? What are your expectations of the future?

5:59How is this motivating some of the behaviour? And that's where the findings of the report are pretty startling. I would say a little alarming but certainly then motivates me coming back to my day job if there's some pretty easy things to fix in order for us to get to that situation where they're retiring and they're having a much more comfortable outcome. So before we get into the where they're putting the money did you find out did you get a sense of why they're saving more because it was interesting during the pandemic because obviously we weren't able necessarily to spend as much that people did have a bit more disposable income not everyone but some people did and I think there was a there was definitely you know anecdotally from what people said to me a sense of like oh now this really is we don't know what might happen in the future we better save a bit and is it connected to that and has that kind of carried on because people have realised they can afford to save even though they possibly think they couldn't I think that's right The pot that was accumulated when we were all stuck at home and couldn't spend is still very much there.

7:07You know, households haven't drawn that down. So they obviously feel a bit more comfortable with that sort of safety nest that they've provided themselves. And as you say, that then prompts a bit of a better habit for thinking, oh, well, I've got I've already got that account opened. I've got that money there. Maybe incrementally, I can just pop a little bit more in each month. So I think it has shifted us into a better savings habit. But the problems come as we start to look about how they're doing it. Can I ask you one other question before we get on to what your very, very interesting survey shows?

7:42And we should just go through it point by point because it does yield some surprising findings about what British people are doing and their attitudes. There's a big difference between America and Britain on this point. both countries we saw a surge in savings during the pandemic. America has burnt through all of that. Why is America burned through it? What's the difference between America and Britain in your view? Why have we kept the savings habit and they've just gone back to their spending ways? I think it's confidence. I think we had a bigger inflation shock. It was more long lasting. And that was basically more terrifying.

8:24I mean, I don't know about you, but watching my energy bill quadruple was utterly terrifying and I think that lasted that that fear of oh my gosh how am I how am I going to pay my way given this very uncertain shocks to cost of living I think that lasted here much longer than it did in the US in the US they weren't as rocked by Russia's invasion of Ukraine in terms of their energy market so their inflation fell back much more quickly so I think it was that sense of being back in control of their finances, less fearful about employment and inflation that made them think, oh, great, things are back to normal and I can therefore spend that money.

9:07So talk us through, as I say, what your survey discovered. OK, so three key things, certainly in terms of how people are behaving and how they're deploying these savings and some of the assumptions they're making along the way. So the first and most startling is when we think about where this money is going as it's being saved, there's a massive overliance on cash. People are putting that money in their local bank deposit. And don't get me wrong, having your emergency cushion in something that's easy access is absolutely the right thing to do. And for many people, again, you know, as I'm talking about this report, also very mindful that I'm probably speaking to a small proportion of the population who can actually save significantly beyond their, you know, day to day bills.

9:58But even those individuals, when we look at them, there's still an awful lot of that excess money beyond the emergency pot sitting in cash. and and I think what's so concerning about that is you know when we ask them you know why what what do you think if you're wanting to provide for your retirement what do you think is going to be the best asset where's the best place to park your money more people said cash than said stocks and shares and and the evidence to the past sits completely it's not like we've been through a 20-year equity market crash that sort of therefore is giving people rise to these feelings of stocks are too risky.

10:39We've been through, you know, a period of stocks performing very well. In fact, even just since the pandemic, to give you some numbers on this, if that savings, so we've got an additional 890 billion to put some numbers on this savings. If that savings had been put in a global basket of stocks, it would now be, each pound would now be worth£1.39. In cash, even accounting for the fact that little bit of interest you've probably got, It's now worth 91p in terms of what it can buy, the real value of it. So that's, I think, the really startling aspect. We're super addicted to cash. Because of inflation, people have lost money by holding cash, whereas they would have made a decent gain holding stocks and shares.

11:24And people just aren't aware of that. Absolutely. It's really interesting because I've been thinking loads about this because I am totally obsessed with, you know, investing and working out you know where where you can make the most money and how and I have been for a long time and what I've found is I think we don't understand risk properly so my partner's dad was talking to me about where should he put his money he's got a bit of money from his pension and he was I'm not sure where to put it and I was explaining to him about my stocks and shares account and so but he was like oh but I might lose it Steph I might lose it and And I went, no, in the long term, the probability is that you will earn way more money on it than you would by just having it in cash savings.

12:08And he went, yes, but you just don't get the certainty, do you? And so I had this really long conversation with him. I convinced him to get stocks and shares ISA. He did it. And then there was a bit of a wobble on the stock market and he took all his money out and lost money. And I feel that there's a real sense of not understanding what the risk really is, because you always hear on the adverts for investment products that aren't cash ones, there is a chance your money may go down as well as up. And I think that instantly puts people off, because inflation is a really hard thing to understand, because you just see the value of your cash go up, but you don't see, in real terms, it being eaten away at.

12:51So for me, it feels like we need more education around what risk really is. And with more evidence, like you're saying, of the difference between having it in a cash savings versus stocks and shares over a certain length of time. But people just fear it. There's so many things that you've just said about your experience with your partner's dad that come through in this survey. You know, people are saying it's the fear of loss is very clear. but you're right it's that you know really what we're saying with stocks and shares is you don't put your emergency cash in in the stock market you know if it's done if you're needing to buy a car next year if you're needing to you know have some money in case you're out of work for a period no of course you don't put that in the stock market but what we're talking here is about people preparing themselves for how their life they're going to have in their 60s 70s 80s 90s and 100s My nan is 102, as I say.

13:49Wow. Big point of this report. What's her secret? Love her. I don't know, but gosh, I hope I've got her genes. Bingo seems to be her secret. Brilliant. That's gambling in another. But you're absolutely right. The fear. And I think that is the education piece of getting people to understand. Having your mindset, it might go down 10%. And then having your mindset, it might then go up 20%. You know, and therefore pop your money in and don't look at it. I mean, some of the I think the new technology actually is going to prove very unhelpful for how people manage their money, because we're going to have easy access to tracking it and then making bad decisions because, you know, the gut can work terribly against you when you're thinking about long term decisions.

14:36So, of course, stocks and shares go up. I mean, look at the S &P this year, the US stock market. It fell 20 percent. It's now up 26 percent. That's within the last five months. So absolutely, it's a bumpier ride. But over the long term, we have seen cash does not hold its value because at the end of the day, it's all about what you can buy in 30, 40 years time. but the stock market does you know your average returns are in the stock market over a really long period of time depending on where you are but you know something in the region of high single digits versus zero on cash so getting people really comfortable with the fact it's going to be a bit bumpy um be prepared for that that's fine that's normal that's the way these these markets work but stick with it it was very clear from your research and i didn't think this was new at all actually this has been a phenomenon that we've all observed our entire lives that young people basically think retirement never comes and therefore if you're young you know almost nobody thinks I've got to put money into a pension and I say give us the figures on that in a minute but the one of the things that's changed across my lifetime is you know when I entered the workforce because we lived in a much more paternalistic society and because everybody knew that, you know, if young people have got a choice between going out and have a good time with some money or putting it away for when they're 60 or 65, they're going to choose to spend it on having a good time.

16:08When you got your first job, there was a pension fund provided by the employer. It was a final salary pension scheme. And I think you could opt out, but it was very hard to opt out. It was basically taken for granted that some of your money and the employer's money would go into this pension pot. Now, we do have now compulsory pension savings, but at really low levels of saving. We have gone backwards, haven't we, in terms of trying to correct this normal sort of psychological instinct of young people that they're never going to be old. So why should they save? Absolutely. I mean, to give you the numbers on that.

16:50So a quarter of the younger cohort that we surveyed had no plans to think about it. Just to drill down on that, is that saving for retirement or saving? Because what you are also seeing is there are some young people who are now investing and looking at investing for not retirement, but just because they think that's where they might potentially make more money. So like medium term rather than long term. Not a lot of that, sadly, coming through in the survey stuff. I mean, there was even though when you look at the drilling down into those holding in cash, the younger cohort, when you were asking them about cash, I sort of expected the result to be, well, I'm saving for my house deposit or I'm saving for more immediate, you know, planning a family, etc.

17:35And it was and actually the answer that sort of startled me was retirement's a long time away, whereas time is the sharpest tool in an investor's armory. You know, just to give you the numbers on that, if you started popping some money into stocks when you're 25, you'd have to input, put into that pocket,£34 ,000 less than if you started at 55 in order to get to£100 ,000. So you've got to put so much less in because of how it compounds. You know, you pay you pay£100 in and then you get your little bit of interest on that. And then the next year you get your interest on top of the£105 is let's say.

18:15So the young aren't using that. The other aspect that comes out, particularly about the younger cohort from the survey, a few worrying things. One is expectations on how they're, what they're, if they can get a house, how that's going to prepare them for their retirement. So we already know, you know, relative to the US, our wealth, half of our wealth is in property assets. So what is the proportion in the States? In the States, it's more like 20%. Right. So this British obsession that your pension is your house is really quite extreme. And if I looked at, so I asked particularly that younger cohort who, you know, it's not really surprising.

18:59They've probably watched their parents' home quadruple, if not, you know, even higher in value. And when I said to them, house prices have risen over 200 % in the last 25 years, what do you think will happen over the, will it be less, more the same? 71 % of that younger cohort said that it's going to be more than the last more than the increases we've seen in the past and that just can't happen because at the end of the day houses are only worth what people can pay for them and we've had some sort of extraordinary factors in the last 20 years of no additional supply the government's now correcting that with its housing plan massive deregulation of the banks which allowed people to borrow more for a given income that's of course being pulled back so we had house prices decouple from earnings temporarily but that just can't happen so again this the whole lens that i'm doing this survey is how people have a have a vision of how they want their life to be in retirement are it are the things they're doing today going to live up to their expectations and massive over-reliance on cash is a problem massive over-reliance on what their property is going to serve them as a pension if they can get If they can even get a property.

20:14And then the other aspect of the young cohort, which I think maybe speaks to some of the people you might have interacted with, Steph, is those that are interested in investing, this younger cohort. Where they're turning to for advice is Finfluencers. Yes, I knew you were going to say that. Social media. And that, I think, of course, takes us into the risk of what advice they're getting. are they going to be pushed into assets which maybe don't have the the characteristics that are going to serve them i mean i'm very much thinking about cryptocurrencies and some of the volatility there and so kind of getting even those that are thinking about not just saving but investing are they getting quality advice and are they then deploying their money in suitable long term vehicles that is so true because that again is what i've been talking to quite a few young people about is that for influencers who are giving these kind of sound bites on what to do with your money on TikTok and you like you say a lot of this is kind of high risk volatile stuff and and not comparable really to stocks and shares but can I just ask you on the drilling down on that point about compound interest because I think you're right again when it comes to people deciding what to do with their money they don't necessarily understand that you know your stocks and shares is likely to beat inflation compared to cash savings.

21:39And they definitely don't understand compound interest because it's the same with debt as well, not understanding compound interest when you're getting credit cards and things like that. There's a real education point here. Like that example you just gave of if you start saving when you're 25 and you're going to have to put in 34 grand less than someone who starts later on, that's really tangible. That's like, wow, 34 grand, And that shed loads of money to someone. But it's never explained like that, is it? No, exactly. And, you know, there's this whole debate about whether Einstein did say that compound interest was the, you know, the new wonder of the world.

22:17But it's parking your money and just in simple terms, it's just as that money, you know, if say you put it in the stock market and the company has paid you a dividend of, say, you know, in the UK at the moment, the FTSE is paying you 5 % dividend. so you get 5 % so your£100 has become£105 even if you don't add in anything more then the following year you know you're then going to get that the if you've reinvested that little £5 that you got from the dividend back in the stock market then next year you're getting the 5 % on£105 so this is the point like and this is what I really want to reach people on nobody's got abundant money we've still got a cost of living pressure so we've got to make the money that we are saving work really really hard for us and and you know making use of some of these quite simple tools start as early as you can let that compounding work get in the right asset class for you you'd be really amazed how that accumulates you know as you say 34 000 pound for is is above a median salary in the uk that's a whole year's income that you haven't had to save because the market's done the work for you karen if you could sit tight for a couple of minutes we will be coming back to you but first a quick break and then to our small business barometer supported by Monzo Business.

23:39Hello welcome back to The Rest is Money with me Steph McGovern. I'm with me Robert Perston. Now we're going to be talking to Karen Ward again in a couple of minutes but first it's time now for our small business barometer brought to you by Monzo Business and this of course is our monthly look at the kind of challenges and opportunities facing SMEs because let's not forget they employ together around 60 % of the UK workforce so what's happening with them matters and we love talking about this and this month the focus we wanted to talk about given how much is happening internationally and how we keep talking about all the global pressures on business is about those small businesses who are selling abroad.

24:24It's one in nine UK SMEs now sells internationally, and it's everything from fashion brands to vegan bakeries. So I think we're kind of looking at the micro exporter. So founders who think internationally from day one, even if they're only like shipping a couple of parcels abroad a week. It feels, Robert, that it is a lot easier to do that now because of all the different platforms out there for um but you know particularly people in the arts and crafts and things like that to be able to sell abroad from day one so there are the technological changes that definitely make it much more straightforward and easy for any business big or small to get into international sales and we should talk about that in some depth.

25:15I think it is quite important to remind people that when we left the EU, quite a lot of businesses shut down, some of them, their international sales, because all of a sudden there was a whole load of bureaucracy and admin associated with selling into the European single market. And there were a number of businesses that turned their back on selling abroad because their main market was Europe's single market. Now, the good news is that there are many, many platforms from sort of Shopify and Etsy are sort of examples of these, which make it relatively simple to sell abroad. It isn't utterly without risk, but you can massively reduce the risk.

26:04And not only you can reduce it, any ambitious business should be thinking about taking advantage of sales outside the UK. It's a sort of no-brainer. You want to expand. You want to be in the biggest market. I have been helping my dad with this. My dad's an artist, and we've been using a platform recently to sell his art abroad. And it's really interesting these sites now, which act as the middleman, in these situations and and actually it's been really straightforward because I was worried it would end up with me practically with another full-time job but it's been a case of uploading bits to an online user interface thing they then work out pricing and stuff like that they help you with all that based on what they see in the market and then they will collect the a piece of art from you and do all the postage and everything so you can just sell something you know online someone buys it you just package it up someone comes and collects it and takes it abroad for you now obviously they take a massive cut of their money but it's been a way of helping my dad with the business side of things that he's often struggled with over the years i mean one of the interesting I think challenges is you know do you try and go for a strategy where you get as sort of as many customers as you possibly can or do you think about a strategy which says actually it's much better to sort of build a relationship with us with a sort of small number of of of customers so a friend of mine with a brownie business he's grown it really quickly by doing this limited edition run so everyone suddenly is like oh we better get them now before they run out and so it can be used as a good marketing thing and I know he does that where he'll do a solid run of bacon for a couple of days sell the brownies all over but do it as a limited batch so that he's not letting anyone down if the orders are too big and you can't fulfill them because that's key as well is not letting customers down because you can quite easily get a bad reputation if you over commit and don't deliver i mean the other thing which we should obviously point out now that we're moving into this age of so-called agentic artificial intelligence where essentially artificial intelligence can uh do manage so much of the logistics that you know traditionally humans have had to do there will be pretty soon ai services which will take almost all the hassle out of executing sales abroad.

28:51You know, it'll fill in all your customs papers for you. For example, it's usually sensible to have a human just double check that all the forms have been filled out properly. But frankly, all the donkey work should be able to be done totally automatically. Speaking of donkeys, did you know that if a donkey falls in a swimming pool, the best way to get it out is to fill the swimming pool with water not empty it and lift them out that's the fact i've learned in the last week

29:23not the same for a car okay is this is this the small business you and i are creating it's it's we're creating a an international rescuing donkeys business what a good idea there we go well thank you once again to our business banking partners monzo business for supporting this part of the show you know it's really important as well as covering all the big global stuff we talk about small businesses uh you can join me and over 600 000 other businesses already banking with monzo business and sign up for an account today only sole traders or limited company directors in the uk can apply t's and c's apply and now back to our absolutely gripping chat with Karen Ward of JP Morgan Asset Management.

30:07The costs for all of us, in terms of the burden on the tax system of over-reliance on the pay-as-you-go state pension are set to become punitive. Yeah. I mean, let's go into, and as we talk about the role of the state, so first of all, there are some pretty high expectations on the role of the state and it's it's pension it's health care and then it's your elderly care like should you need residential care so that's those are the aspects when I think about the state's involvement and there's particularly the two cohorts that I might have thought would be a little bit more conservative about how they thought the state might support them were the young, because we know our population is aging pretty rapidly, or above median earners.

31:03But actually, the survey showed that 40 % of the young expect the state in all three aspects to be at least as generous as today. And half of median earners expect the state to be more or as generous as there are today. And I think this is the one part that really concerns me and and i suppose why i'm doing a bit of a public awareness campaign because the government cannot do this this is beyond politics our this is no critique of our of the government or rachel reeves or any chancellors that are going to come in the coming governments because you know the older part of the population vote and there's no incentive for any current government to say oh you 30 year old i'm not sure that you're going to get what your parent got so just be mindful of that and start putting a little bit more today you know that that's absolutely no political incentive to to do this whatsoever because at the end of the day politicians have to get elected but that leaves us therefore with this sort of knowledge vacuum of the youngsters you know we're just sort of stumbling through time without anyone being equipped or really made aware of the fact that our population is aging pretty rapidly already today there are 45 percent more retirees and only 19 percent more working people than there were at the start of the of the century and that's those numbers get bad pretty quickly so 90 percent more people in work than in 2000 but 45 % more people retired so a smaller number of people in work supporting the retired population.

32:47Exactly our dependency ratio the number of older people is growing really rapidly and no chancellor no matter how good they are can make those numbers add up on current policy. In your research there's a couple of really stark numbers in terms of what that means for the viability of the British state. So just share those with us. And this is to do with on some perfectly reasonable assumptions, what happens to the national debt over, let's say, a 50-year period. On current expectations, and this comes from the Office for Budget Responsibility, over the next 50 years, we're going from a level of debt to GDP, which is around 100 % today.

33:35But then that reaches about 275 % in the next 50 years. Now, that probably can't happen. So this is the whole point about if it's going to be required over the next 20, 30, 40, 50 years, some change in how that money is allocated. You know, I think it's right that people are aware of that today. You've got an even scarier number based on if productivity doesn't improve and we don't invest in the way that we should, what then happens to the ratio of national debt to our national income? Yeah, it's a pretty scary number. So it's 650 % of GDP. Which, to be frank, we're bust at that point. That's not a realistic future for us.

34:31No. And exactly as you say, Robert. So this is why getting this sorted today, every act to involve government regulators, everyone in my industry, getting it sorted today so that people are saving well, that money is reaching British businesses. Those British businesses are investing. That then equips their staff with more staff. Everybody's more productive. that then keeps us in the best scenario where actually you know debt's still rising it's still not to say that difficult decisions won't be made but the situation is less grave so we've got to fix all this today but we've also got to be mindful that even in that best case scenario where productivity is recovering we still are probably going to have you know 40 50 years time those challenges about rationing exactly what the state can provide to the older population.

35:23And, you know, the analogy here is dentistry. I got straight teeth on the NHS. I mean, remarkable now, you know, it's a fortune. That's a thing of the past, right? And I think we're just reminding, and I think that's important because often when I have this conversation, certainly I've had it within my own family, and they say, well, of course I'll get it because I've paid for it and I'm entitled to it. And I say, well, but we, you know, the money that you paid in during your tax system, that wasn't stored in a pot for you. We're in a pay-as-you-go system. So, you know, just again, like just try as much as you can to think about, can I possibly do everything I can today to set myself up?

36:06Just have a little bit of a question over how much the state is going to provide the full, you know, comfort of retirement that you're looking for. yeah it's really eye-opening isn't it everything we've been talking about and those statistics you've you've found so thank you so much karen for that absolute pleasure lovely to see you as always and that's it from us all the rest is money goodbye yeah bye-bye