Why Financial Literacy Matters for Closing the U.K.’s ‘Advice Gap’

This blog is based on an article published in Social Policy and Society by Julie Dick and Jacqueline Harvey.

Planning for one’s retirement is more complex than it has ever been. Ageing populations, underfunded state pensions and economic instability are some factors contributing to the so-called pensions crisis. Lacking the required financial capability, many people are overwhelmed and confused, both about pensions in general and about how their own pension savings will translate into retirement income in their later years.

In addition, individuals have much greater responsibility for managing their retirement savings than previously. This is the case for the decreasing number of defined benefit (DB) pension scheme members and the increasing number of defined contribution (DC) pension scheme members. In the U.K., members of DC schemes face even more complexity since the transformational 2015 ‘Pensions Freedoms’. Prior to these reforms, the majority of savers converted their pension pots to an annuity to last them over their remaining life, a relatively simple undertaking. Since 2015, individuals can draw their savings in more flexible ways. These include converting their pension pot to an annuity, drawing it all in cash, drawing it in smaller chunks using various drawdown arrangements or leaving it invested. Members of the few remaining DB schemes are not exempt from having to make important pension decisions. While providing a comparative degree of pension predictability compared to DC schemes, DB schemes still require their members to make important decisions, both when approaching and at retirement.

Without help, however, much of the public struggle to navigate the myriad complexities and to make the right pension choices for them. Pensions are not widely understood by the layperson.

The good news is that there is help out there. Guidance, as it is termed, is available free of charge to everyone and is the responsibility of the Money and Pensions Service, an arm’s length body of HM Government. It is useful to many people with straightforward circumstances. For those with less straightforward circumstances, however, guidance is often insufficient. This is where financial advice is required from an independent financial adviser to help individuals make optimal decisions, and this is not free.

In the U.K., despite help being available, there is a financial advice gap; a gap between those who need financial advice or guidance and those who seek it. This is important because there are consequences to making poor retirement decisions; some retirees have run out of money in retirement as a consequence of making unsustainable rates of drawdown; some have lost substantial pension savings to taxation, and some have withdrawn pension savings only to invest them into cash-based products that generate poor returns. While there are many possible reasons why pension savers do not seek advice, one reason may be a lack of pension literacy.

Pension literacy is a distinct concept from financial literacy, a term more widely used and researched. We define it as one’s knowledge and skills in relation to pensions that are sufficient to make effective and optimal choices about one’s own retirement.

Motivated by this changing pensions landscape in the U.K., in this article, we investigate the impact of pension literacy on the propensity to seek financial advice about pension decisions.

Our study involved developing a comprehensive test of pension literacy with experts from the financial services industry. Our test was completed by 581 individuals aged over forty from the North East region of England. We measured both participants’ actual and perceived pension knowledge as well as their confidence in planning for retirement and their perceived retirement security. We used logistic regression analysis to address our research question, which was: How does pension literacy impact the propensity to seek financial advice when making choices about the decumulation phase of retirement?

We developed two hypotheses to enable us to explore the impact of both actual and perceived pension literacy on advice seeking separately.

In the article, we explain how we found a complementary relationship between pension literacy and seeking financial advice. In other words, those with better pension literacy were more likely to seek advice. We surmise this is possibly because their knowledge enables them to appreciate the value of doing so. It also suggests that perhaps those who need advice the most, the less pension literate, are less likely to seek advice.

We found perceived pension literacy to have the opposite effect. The higher the perceived pension literacy, the lower the likelihood of seeking advice. The more the individual thinks they know about pensions, the less likely they are to seek help, presumably as they believe they know enough to make decisions without it.

Interestingly, some of our participants changed their minds about seeking advice once they were given their test results and thus became aware of their actual level of pension literacy. This suggests that some individuals ‘don’t know what they don’t know’ when it comes to pensions and that their perceived pension knowledge cannot be relied upon as a proxy for their actual pension literacy.

The article goes further. We explore how age, gender, employment status, marital status and pension pot size impact the propensity to seek advice. We deconstruct the concept of pension literacy using principal components analysis and determine the component of pension literacy most strongly associated with the propensity to seek financial advice. We provide recommendations to address the issues we find in our study which we hope will help to address the financial advice gap in the U.K.

Pension literacy will be an even greater priority for future generations as more DB schemes close and are replaced by DC schemes. These individuals will face complex decisions for which pension literacy, as well as access to appropriate forms of advice, will be increasingly important.

---

Reference

Dick, Julie, and Jacqueline Harvey. 2025. “The Importance of Financial and Pension Literacy in Closing the Financial Advice Gap in the U.K.” Social Policy and Society: 1–26. doi: 10.1017/S1474746425000272.

About the authors

Julie Dick is an Assistant Professor at Newcastle Business School, Northumbria University, Newcastle, U.K.

Jacqueline Harvey is a Professor of Financial Management and Director of Business Research at Newcastle Business School, Northumbria University, Newcastle, U.K.