Can you pass a financial literacy test that nearly half of adults fail?

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

A test of 3,000 adults (weighted to be nationally representative) found that 20 percent got no answers correct and 24 percent got only one answer correct.

About 30 percent passed the exam by answering two questions correctly and 26 percent earned top marks, according to research by investment firm Abrdn.

Young people and women had the highest failure rates, and the 44 per cent who showed poor financial literacy equates to 23.3 million adults in the UK, the firm says.

Abrdn analysed the finances of thousands of people who took the test and found that those with good financial knowledge, who answered at least two questions correctly, have £20,000 more on average in their pension pot and are 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 answered no questions were about twice as likely to have a low risk tolerance as those with the highest score: 62 percent versus 34 percent.

However, better-off people (which translates to men and older people) are more likely to have opportunities in their lives to learn financial literacy.

Meanwhile, those with wealth will have achieved sufficient financial security to have investments and take greater risks with them.

The general rule of thumb for whether you can afford to start investing outside of a pension fund is that you should be debt-free (except for a mortgage) and have an emergency savings fund equivalent to between three and six months’ salary.

Abrdn acknowledged this in the study, saying there are likely several related factors affecting their findings, including low wages and socioeconomic background contributing, for example, to 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 answers to the above questions correct, 69 percent versus 44 percent, Abrdn found.

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

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

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

Among those with low financial literacy, the proportion was: 18 to 34, 56 percent; 35 to 54, 46 percent; 55 years or older, 33 percent.

For those who had no 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 their views on the economy and the stock market.

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

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

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

Age did not have much influence, but young people were more likely to invest. Londoners scored the highest at 51/100, and Scots 45/100.

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

How to improve financial literacy

To combat the lack of 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 that focuses on financial skills.

It also suggests integrating personal finance into related subjects such as maths, economics, citizenship and food technology, noting 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 people’s preference for 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.