Can you pass a financial literacy test that almost half of adults FAIL…?

Almost half of people fail a financial literacy test that asks three key questions about interest rates, inflation and risk, a new study has revealed.

The test of 3,000 adults – who were weighted to be nationally representative – found that 20 per cent got the answer wrong and another 24 per cent managed only one correct answer.

About 30 percent passed by getting two questions right and 26 percent passed the test, according to a survey by investment firm Abrdn.

Young people and women had the highest failure rates, with 44 per cent demonstrating poor financial literacy, equating to 23.3 million adults in the UK, the firm said.

Abrdn analyzed the finances of thousands of people who took the test and found that those with good financial literacy who answered at least two questions correctly had an average of £20,000 more in retirement and were more likely to have a pension in the first place.

And those with high scores were almost twice as likely to hold investments as those with poor scores, 39 percent versus 21 percent.

Those who got none of the questions right were about twice as likely to have a low tolerance for risk as those with the highest scores, 62 percent versus 34 percent.

However, people who are better off—which skews toward men and older people—have a better chance of learning financial literacy later in life.

Meanwhile, those who are rich will achieve enough financial security to invest and take higher risks with them.

The usual rule of thumb if you can afford to start investing outside of retirement is that you need to be debt-free (except for a mortgage) and have an emergency savings fund worth three to six months’ salary.

Abrdn acknowledged this in the study, saying it’s likely several related factors are influencing its findings, including low wages and socioeconomic backgrounds contributing to things like whether people with low or high financial literacy have a pension and its size.

Who tends to score high on financial literacy?

Men tended to have better financial literacy than women, with two or all of the above questions correct, 69 percent versus 44 percent, Abrdn found.

Among those with low financial literacy, meaning they got one or no answers right, 31 percent were men and 56 percent were women.

Of those who did nothing right, 13 percent were men and 26 percent were women.

In terms of age, the distribution among people with good financial literacy was: 18-34, 44 percent; 35-54, 54 percent; 55+, 67 percent.

Among those with poor financial literacy, it was: 18-34 56 percent; 35-54, 46 percent; 55+, 33 percent.

For those who did not have the correct answers, it was: 18-34, 26 percent; 35-54, 22 percent; 55+, 14 percent.

Meanwhile, Abrdn also surveyed its cohort of 3,000 adults, weighted to be nationally representative, about their savings and investments and views on the economy and the stock market.

It measured them based on criteria such as their understanding of products, likelihood of increasing holdings, ability to manage savings and investments, risk tolerance and confidence in their own financial situation.

Overall results were propensity to save 53/100; propensity to invest 37/100; economic outlook 46/100; and propensity to save and invest (a combination of all three) 45/100.

Abrdn says men scored much higher than women, and the average propensity to save and invest was 51/100 versus 41/100.

Age does not change this, but younger people are more inclined to invest. Londoners achieved the highest score of 51/100 and Scots 45/100.

People in Wales scored 43/100, Northern Ireland 44/100, Yorkshire and Humberside 43/100 and the South West 44/100.

How to improve financial literacy

To combat low financial literacy, Abrdn has called on the Government to extend compulsory money education to primary schools and sixth forms in England and to consider introducing a new GCSE and sixth form qualification focusing on financial skills.

It also suggests integrating personal finance into related subjects in maths, economics, citizenship and food technology, pointing out that Scotland already does this in its school curriculum.

The initiative is part of its campaign called ‘The Savings Ladder: A Manifesto to Get Britain Investing’, which previously looked at how people are favoring property over pensions as a long-term investment.

Its recommendations include simplifying Isas, scrapping stamp duty on UK shares and investment funds and doubling minimum pension contributions, as well as improving financial education.