What do young people REALLY think about retirement?

Iona Bain was a judge of this year’s Baillie Gifford’s Young Writers’ Competition and discusses what some of the essays indicate about youngsters’ attitude to retirement.

Iona Bain

Would you ever ask a young person when they plan to retire, or how they plan to fund their old age?  It may seem like a drastic proposition, but parents and teachers across the country have taken on the brave and often overwhelming task of tackling our looming pensions crisis, all in the name of the Baillie Gifford Young Writers’ Competition in association with the Financial Mail.

The aim was to concentrate young minds on a range of ominous factors that will determine when today’s workers can retire and how much they can expect to receive from different kinds of pension. If they look at just how much the pensions landscape has been changing (not necessarily for the better), it should help them reach profound conclusions about whether they can afford to fall back on the government and their boss – or whether they need to take matters into their own hands.

As one of the judges, I gained a precious insight into what teenagers aged 13 – 18 are learning about the financial wilderness, and how that is informing their attitudes going forward. Much of what was written was heartening, nuanced and responsible. Hardly anybody disputed the fact that they need to save for their retirement. But the question of ‘how’ could not have sparked a more diverse response.

The vast majority of our young writers knew their generation would live longer than ever before. Many said they were prepared, even enthusiastic about working into their 70s, in keeping with today’s burgeoning army of older employees who either choose to postpone retirement or have to rely on a wage to keep going. One of the winning writers did, however, believe the demanding nature of her chosen profession – medicine – means she can’t carry on past a certain age. That echoed a desire among most of the writers to try and secure a long, active retirement, occasionally studded with round-the-world trips.

Some had meticulously learned the conventional routes to such a retirement; number one of all was a workplace pension. Surprisingly, there were a great number who knew their minds and had already picked out careers (more than could be said for me at that age). Some said they felt safe in the knowledge that they would make contributions to one employer for the rest of their working days. I admired such a diligent ethos, but it couldn’t help but bring me back to a key difference between the generations in terms of their pension outlook. Final salary pension schemes are now on the verge of extinction (something commonly recognised in the essays), defined contribution schemes will yield far less generous benefits, and those signing up to personal pensions have dwindled, partly in response to murky charges and misleadingly optimistic predictions of growth. All told, it’s leading to a startling drop in what workers will now retire on compared to yesteryear.

Meanwhile, there were those entrants who were aware of the serious limitations of auto-enrolment into a pension at work, whilst others adopted a “better than nothing” approach to this important development.

Here are some raw calculations from pensions experts Hymans Robertson. Within the NEST (National Employment Savings Trust) scheme, which takes in those companies without pension provisions, supposing employees could be enticed to make maximum £4,400 a year contributions from age 25 for another 40 years, and suppose too that investment returns merely keep up with inflation.  That builds up to a seemingly grand pension pot of £176,000. But then you have to divide by 20, to work out how big an annual income that would create from an annuity today, and you end up with a rather lame £8,750 per annum (source: Herald Scotland, March 2013).

The state pension on top would most likely double that figure to around £16,000  – still not the windfall you might expect from all that saving.  So will auto-enrolment hypnotise young workers into giving up precious salary for what may be a false sense of security?  Or will many look at the figures and decide to adopt their own strategies, which might involve getting on the housing ladder first, and then thinking seriously about their own long-term investments?

Encouragingly, most of the young writers raved about ISAs (Individual Savings Accounts) as a flexible and tax-efficient way of saving for retirement, though many rightly bemoaned the shocking rates and corrosive effects of inflation. Others displayed a remarkable ease with the notion of investing. Some very thoughtful cases were presented for all kinds of assets and markets. These ranged from the traditional (blue chip equities, property) to the more esoteric (technology and future energy). It appears that young people have a much greater appetite for bold investment enterprises than is expected. However, they don’t have any illusions about the risks these bring (past performance is no guarantee of the future,  capital can fall as well as rise, you may not get back what you put in).

Ultimately, most entries demonstrated a first-rate understanding that you cannot rely on automatically low contributions into Defined Contribution schemes or a state pension to provide the goods. They all recognised that a diverse financial strategy, adapted to suit every stage in their life, would be needed right from the get go. While pensions are the obvious starting point, perhaps this more pressurised generation will be served just as well by the emergence of more accessible corporate ISAs, and the government surely needs to revamp the conditions on ISAs generally, including a higher cash allowance and the ability to swap freely between that and equities.

It’s far from ideal that schoolchildren have to look ahead to the ‘winter’ of their lives in this way but if it gets them thinking about the crossroads we now face, the choice between inactive ignorance and proactive management, it could well save the day.