Financial ‘exam results’ show need for advice
First published 09 September 2019 • Updated 06 September 2019
Users of Unbiased reveal their solid grasp of some aspects of personal finance – but worrying gaps in other areas. We break down the results of our ‘Back to School’ money quiz to show where people most need advice. Article by Nick Green.
‘They don’t teach you this stuff at school.’
As the UK’s schoolchildren trudge back into class for their new year, there are some vital subjects that very few will learn about. The exams they sit might one day earn them an income – but they won’t be learning much about how to manage that money. When it comes to huge life decisions such as getting a mortgage or saving into a pension, many people find themselves in an ‘exam nightmare’ – staring at the questions having done no revision.
So we at Unbiased created our own special ‘Back to School’ campaign. This one wasn’t for kids but for the parents, grandparents and the many other adults who left school without a financial education. Most revealing was our ten-question quiz covering everything from mortgages to pensions. On some topics people were encouragingly well-informed, but in other areas many struggled.
So in true mock-exam fashion, here’s a summary of the test results – and what those results tell us about where and when people might need financial advice.
The questions people did best on: pensions and home ownership
Unbiased users clearly know a thing or two about pensions. Nearly everyone (92%) knew that people on the state pension don’t pay National Insurance, while a good number (74%) knew that most workplace pensions aren’t final salary schemes. Home ownership is another confident area, with 87% of our exam candidates correctly defining ‘equity’ as ‘the property’s value minus the outstanding mortgage’.
A smaller majority of candidates (62%) also knew that making multiple mortgage applications can harm, rather than help, one’s chances of getting a mortgage.
Meanwhile, significantly over half (57%) of people taking the test knew the different rules covering when different types of pension (money purchase vs final salary) start to pay out. However, this means that nearly half did not.
Where people struggled: inheritance, savings… and pensions again
On other questions, our exam candidates didn’t do so well. In particular, they slipped up in the areas of savings & investments, tax, and the options for accessing pensions.
Lifetime ISAs pose a puzzle
A surprising 49% weren’t aware of the full benefits of one of the most powerful savings products available: the Lifetime ISA. This versatile product offers a 25% government bonus on savings, and can be used for two purposes: saving for a deposit on a first home, or to spend any way you like after the age of 60 (hefty penalties apply at other times).
Many (31%) assumed it was only for saving for retirement – perhaps being misled by the product’s name. Meanwhile 14% didn’t know about its usefulness for retirement saving. Some are evidently confused by the concept of a combined product for these very different life goals.
Inheritance tax catches people out
Offered a choice of four different inheritance scenarios, our candidates found it extremely hard to pick the one that would be guaranteed free of inheritance tax (IHT). The options were:
- An unmarried partner’s share of a fully-owned home
- The remaining money in a parent’s pension fund
- A family home gifted to you, in which your parents continue to live rent-free
- Stocks and shares held in an ISA
Answers were almost a four-way even split, indicating that most people simply had to guess. The right answer (and in fact the most picked answer by a small margin) is ‘The remaining money in a parent’s pension fund’. Unspent pension funds are free of inheritance tax or any other kind of death tax (pre-2015 they were subject to a hefty 55% tax, but no longer).
The many wrong answers here should be a wake-up call for people who haven’t done their inheritance tax homework. Around 19% thought an unmarried partner would inherit their share of a home free of IHT. A spouse would – but the unmarried partner might have to pay IHT (and won’t inherit their partner’s share at all unless this is specified in a valid will).
More than a quarter thought an ISA gives protection from IHT (it doesn’t; it only shelters from income tax and capital gains tax). And the same number made the notorious blunder of thinking parents could avoid IHT by transferring their home into a child’s name while continuing to live there rent-free. This is called a ‘gift with reservation of benefit’ and the taxman rakes in over £100m in tax every year from people who tried this ‘trick’ and were caught out. So, no cheating at the back there.
Pension freedom still flummoxes some
Pension freedom has given people more options for taking an income from their pension. However, our test revealed that there's still uncertainty about what these are. A sizeable 45% of candidates thought that withdrawing an entire pension pot wasn’t possible (it’s usually a bad idea, but it’s certainly possible). Meanwhile a similar number thought it was possible to get a flexible income that was also guaranteed for life – which isn’t the case, as a flexible income (i.e. a drawdown scheme) comes with the risk of running out of money.
Remarkably, nearly 12% of people seemed unaware of the existence of annuities (a fixed income guaranteed for life) – despite these being historically the most common way to take a pension.
The toughest riddle: pension tax relief
One question in particular bamboozled our quizzers: how much extra money do you receive through pension tax relief? The vast majority underestimated this, with only one in five getting it right. Our question was:
You pay £100 into your pension pot. With a 20% tax relief this becomes:
- Still £100
Perhaps understandably, nearly 60% gave the intuitive answer of £120, assuming that 20% tax relief would increase their contribution by 20%. But tax relief actually works in a more tricksy way. With this calculation, what you’re looking for is the figure that, when reduced by 20%, would become £100. And the answer to that is £125.
Money paid into your pension pot is treated as if it was never taxed in the first place. So (assuming you are a basic rate taxpayer on 20% income tax), the £100 you pay into your pension results in a ‘refund’ of that income tax on the contribution – effectively boosting it by 25 (not 20) per cent. Weird, isn’t it!
In summary, paying into a pension is far better value than 80% of you seem to think. So that’s another important lesson learned.
Did you pass your financial exam?
The average score in our financial mini-exam was between 50% and 60% - not bad, but certainly offering room for improvement. In particular, people stumble over issues relating to tax, or the finer points of how pensions work. These are not trivial knowledge gaps, for in real life they can represent a loss (or gain) of many thousands of pounds over a person’s lifetime.
Ours was just a five-minute financial quiz. But it’s worth remembering that most people are sitting a lifelong financial exam right now. With so much money potentially at stake on every question, isn’t it worth trying to get as many of them right as you can?
Find all the revision notes you need in Life's Biggest Decisions, and find your financial adviser at Unbiased.
1 Quiz conducted by email to Unbiased subscribers in August/September 2019 (178 respondents).
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