The banking crisis exposed our weak grasp of the basics of finance. We should all go back to the classroomby Alistair Darling / January 26, 2011 / Leave a comment
Published in February 2011 issue of Prospect Magazine
Listen: Alistair Darling discusses financial literacy with Prospect’s editor, Bronwen Maddox[audio: http://www.prospectmagazine.co.uk/Podcast_Financial_Literacy.mp3]
At a basic level, financial literacy is people’s capacity to understand the consequences of what they do when they open a bank account or enter into a credit card agreement—and the rights and responsibilities that go along with these.
Understanding the implications of having a bank account and borrowing from a bank are the most important areas of financial literacy, followed by pensions and buying a house. At its most fundamental, financial literacy involves grasping the notion that money can be borrowed only at a cost.
At a secondary level, financial literacy is an understanding of how the broader financial world operates. The general landscape of the economy is something that people ought to have at least a rudimentary grasp of.
Of all the areas of finance that people have to contend with, though, I think pensions is the one they least understand. Part of the problem is the gap in time between putting money in and getting it out. People can grasp the concept of a mortgage, which is easier to comprehend; but with pensions, most people have only a very general idea that somehow, somewhere, they are saving up money for the future. The notion of, say, buying an annuity—an income bought from an insurance company and paid for with an accrued pension pot—is utterly foreign. This is especially the case now there are fewer defined-benefit pension schemes and people have multiple careers, so they are not just looked after by one institution with a job for life, followed by a pension.