Andrew Edwards comes up with some good reasons why young people will benefit from saving into a pension
Last year, the Money Advice Service found that 21 million adults – four in 10 – have less than £500 in savings. Another study, this time by Investec Wealth & Management, found nine out of 10 millennials (those aged between 18 and 35) blame their failure to save on the high costs of living. It’s probably no wonder then that saving into a pension tends not to be a main priority for young people.
This is a worrying trend. For decades, past generations have enjoyed being enrolled into attractive, final salary, ‘defined benefit’ schemes. Furthermore, they didn’t really have to think about it or do anything, it just happened. Then one day as if by magic, they reaped the benefits. The financial crisis of 2008, which saw interest rates slashed, was the beginning of the end for this particular golden goose as far as final salary pension schemes are concerned. In 2016, and especially since Brexit, things have got steadily worse and companies have been squealing about the soaring cost of their old salary-linked pension promises after another interest rate cut triggered tumbling bond yields. The result of all this is that young people are going to have to think differently about making adequate provision for retirement.
So what will motivate young people to take responsibility for ensuring they have saved enough to be able to afford to live comfortably in retirement? I believe there’s a lot more to it than just affordability. Talk to most people in their teens and early twenties about pensions and they glaze over like you’ve asked them to empty the dishwasher or tidy their bedroom.
I quizzed a friend of the family, Lizzy, 23, a primary school student teacher from Paignton, Devon about her views on pensions. At first I could see her thinking “I can’t believe you are asking me about this” but after overcoming the initial shock she was happy to give me her views. Like many people of her generation, the concept that one day she would reach age 55 was like seeing a very small dot on a very distant horizon – so far away that it really wasn’t relevant; or was it?
Being a reasonably intelligent young person she could clearly see the sense of saving for retirement but had no idea of the mechanics or amounts required. Surely a pension is something that comes later in life as there are many other monetary hurdles to clear first. “Isn’t it more important to save for a deposit on a house she asked, or consider paying off my student debt?” I could see Lizzy’s dilemma in juggling her priorities – locking away money for over 30 years is alien to her especially for someone who has yet to own her own property. “And then of course, I’ve seen a nice pair of shoes that I’d like…”
I asked Lizzy if she was aware of any incentives for saving into a pension – did she know about tax relief? This drew a blank. Did she receive any financial education at school or college? Another blank. She didn’t think there would be a State Pension for her when she reaches retirement age and so the prospect of working until 70 or 80 in a noisy classroom of seven year olds suddenly became less attractive! In reality, her employer will make reasonable contributions for her enabling her to stop working earlier than that. However, not everyone will be as fortunate as her, particularly someone who is self employed for example and whose spare cash may be limited whilst they are developing and building a new business.
So how much should young people put aside to achieve a minimal income to bridge the gap between 65 and 70 when they start receiving a State Pension? A 22 year old would have to save an extra £39,000 if they want to match the £7,800 a year State Pension for five years, allowing them to retire earlier (Source: Guardian Money).
Never easy, I know with so many demands on hard earned cash. The important thing is to start planning and saving something from an early stage as the earliest pounds saved are the most valuable.
Here are a few more reasons why young people will benefit from saving into a pension:
Tax Relief – currently, pension contributions benefit for relief from income tax and, if your employer has a salary sacrifice arrangement in place you will also receive relief on the National Insurance. Even though you are giving up some of your wage to gain this tax relief, over the long term you will retain more of your salary for your personal benefit, as opposed to losing it to the government in tax you would otherwise pay.
Employer contributions – take advantage of the additional pension contributions that your employer is obliged to make for you from their coffers if you join an auto enrolment scheme.
Future of the State Pension – don’t rely on this being around in 50 years time. A personal pension will give the flexibility and safety net of being able to stop work (if say, your health is against you) or perhaps take a change in direction from age 55 onwards. By starting early, the bigger the fund is likely to be, which will mean being able to enjoy a comfortable retirement for longer. The bigger the fund also means the larger the 25 per cent tax free element will be giving you options to use this as you please.
Pensions aren’t trendy or sexy and to most young people they are about as exciting as filling out a tax return for the first time on a wet Sunday afternoon. The important point to remember is that people are living longer, often leading busy lifestyles, and with the opportunity to travel more and spend more than ever before. Parents, governments of all political colours and the media, should play their part in encouraging saving for the future; when the day comes I’m sure our children will thank us for it.
Andrew Edwards is Client Services Manager at the Pension Drawdown Company