The psychology of pension success: Can you trick yourself into saving more?

Helena MacPherson highlights Brits’ pension saving struggles, urging small actions, connecting with the future self, and financial education.

Brits need to save more for retirement. We all know this. Why, then, are so many of us still not saving?

When MRM’s 2024 Money Matters Index landed last week, I was shocked to read that less than half of people have a pension (45%).

This seems, in large part, because short-term financial pressures are dominating people’s thinking.

When it came to immediate priorities, at the top, half (50%) said paying bills comfortably, two in five (38%) said paying for a holiday and one in four (24%) said paying off credit card debt.

With bills continuing to climb, having enough money to start saving and investing for retirement was a priority for just 15% of people. Being in the position to retire early was important for only 13% of respondents.

If you know you need to squirrel more away for retirement but don’t feel able to due to other financial commitments, then don’t fear.

We’re here to tell you how you can save more – without falling behind on your short-term priorities.    

The science behind pension saving

First, why do so many people struggle with pension saving? I spoke with two behavioural finance* experts to find out.

Stuart Erskine, director at Flat Mountain Consultancy, a business helping financial advisers to deepen their understanding of their clients’ behaviour and decision-making processes, explains that financial decision-making can be significantly impacted by behavioural theories.

“Like other types of scarcity, poverty can adversely affect cognitive decision-making abilities through mechanisms such as ‘hyperbolic discounting’,” he says.

‘Hyperbolic discounting’ is a concept where individuals tend to favour immediate rewards over future benefits, leading to decisions such as spending disposable income now rather than saving it for a more substantial reward in the future.

“This tendency becomes more pronounced when considering immediate financial needs versus long-term savings,” he adds.

Marliane Owen, from Be Onpoint Consulting Ltd, a company that works with pension schemes to ensure their communications consider the human behind the decision, agrees: “One thing that plays a massive part in retirement planning, or lack of retirement planning, is our connection with the future. We’re geared to look after ourselves in the present. From an evolutionary perspective, this makes sense, as we need to survive for tomorrow.”

The current cost-of-living crisis might exacerbate these issues, influenced by what is known as a ‘scarcity mindset’.

Erskine explains this mindset focuses on immediate shortages rather than future opportunities, potentially leading to poor financial choices, such as resorting to high-interest payday loans and neglecting savings.

Erskine says: “There’s a lot of evidence to suggest that a scarcity mindset can lead to poor decisions – think things like visiting pay day lenders and paying high interest rates. It can almost mean that people aren’t inclined to save.”

Overcoming psychological barriers

But how do we overcome these issues? Erskine highlights the importance of starting with small, manageable actions.

He points to the success of a South American initiative led by Jorge Bolivar Almela at Savinco.org, which helped lift communities out of poverty.

The program encouraged individuals to save minimal amounts, such as 10p per week. This ‘Saving for Learning’ initiative also allowed participants to borrow funds to start microbusinesses, provided they committed to saving, regardless of the amount.

 “Initiatives like this are effective because they shift people’s mindset about money,” Erskine remarks. “It demonstrates that even those who believe they cannot save can start with very small sums.”

Owen says that another trick is to connect with your future self.

“There have been lots of studies on people’s brains which show that, actually, the bit that thinks about the future, and your future self, is the same bit of the brain that thinks about strangers. This means there is a massive disconnect between who we are now and who will be later.”

“A good idea is to ask yourself – where will I be in 10 years’ time? Who will I be? Will I be the same person with have the same values, the same thoughts?”

According to Owen, studies have shown that people who seek to connect with their future selves in this way can go on save more over a period of 10 years

It’s also worth thinking about gamifying saving. “You could try something as simple as starting a savings competition with a family member or friend”.

This doesn’t even need to be for your pension, you could challenge yourself to set aside £20 or £30 in a month for a rainy-day fund to help you get into a savings mindset.

Owen adds: “Things like this help people hold themselves accountable but also normalise speaking about money, which I think is quite important.”

Financial education – lessons for a lifetime

Erskine, along with financial expert Owen, believe that enhancing financial education is crucial for better planning, especially for retirement.

“Opting to save into a pension is a decision that benefits greatly from financial education. It might not change a person’s overall mindset, but it can alter their approach to specific financial actions,” Erskine concludes.

But it can’t be one size fits all, according to Owen.

“There’s a lot of emotion attached to how we manage our money that’s unique to us as individuals. And that’s another reason why people struggle to think about money in the future.”

There are numerous charities and organisations campaigning for the UK Government to improve financial education, but there are things you can to do help improve your money knowledge today.

For example, ask your employer if they offer financial education as part of your employee benefits package. Failing that, Money Helper is a free, government-run organisation that has plenty of great resources available on pensions and money more generally.

When you think about it, pension saving isn’t all that different to going on a diet. If you cut too many calories early on, you’re likely to run out of steam week one. In the same way, saving little and often – and making it enjoyable – will be a far more sustainable way to reach your retirement goals.

*The Oxford Dictionary defines behavioural finance as the study of the role played by psychological factors in financial decision making.

Photo credits: Pexels