Iona Bain, founder of Young Money Blog, shares her views on why pensions are a turn off for today’s 20-somethings…
When I started blogging about young people and money back in 2011, I was immediately faced with a major dilemma. Do I discuss the boring and often complex world of pensions and, if so, where on earth do I begin? Can I make it relevant and helpful, or should I tell the truth about pensions as I see it, even if I was met with strong disagreement?
You see, I knew mentioning the ‘p’ word would seriously undermine any attempts to get young people switched on to money through my blog.
My suspicions were rather grimly confirmed by a recent discovery that any pension article, no matter how carefully researched and argued, would be among the least viewed on my blog – by an absolute country mile.
This stands to reason. As any politician will tell you, sacrifice is a hard sell. Preaching to young people that they need to give up money for the future rubs up against the strong, appealing messages around materialism and hedonism that are pumped at us from all directions. We form strong consumerist aspirations from a young age, priming us to prioritise whatever will get us onto the next rung of social acceptability.
I am not alone in thinking short-term; do I have enough money this month? How much should I spend on that wedding present? What kind of work do I need to get to keep my income ticking over?
Is saving for a pension actually worth it?
Of course, there is much research showing that Generation Y can and does save for tomorrow. It’s just that we are saving for tangible, understandable goals; a home, a car, a wedding. Pensions, by contrast, are a promise of an unspecified income forty or even fifty years down the line.
And here is where I come onto my fundamental gripe about pensions. They are, of course, admirable and potentially life-saving as a concept. In reality, they are on the wane and in need of a major rethink.
The disappearance of final salary schemes has been devastating for the general cause of pensions, and the returns now on offer from defined contribution schemes have made many question whether their sacrifice has been worthwhile.
Indeed, it has been previously reported that 30 somethings who save into a private pension will typically end up with an income just £271 a month – barely enough to cover household bills.
Pensions are inflexible and don’t reflect real life
People have asked whether there are more flexible ways to save for the long term using regular savings and investments. For instance, in New Zealand, first-time buyers have been allowed to access funds from their pension to get on the housing ladder as part of the Kiwi Saver Scheme.
Until recently in good ol’ Blighty, policymakers and the pensions industry seemed indifferent to the painful costs of housing today and how this undermines efforts to get us saving for the future. The answer to this was the Lifetime Isa, mooted by George Osborne when he was chancellor of the exchequer and launched in April 2017. But there was a significant backlash against the product from the financial sector, much of it centering on understandable worries about a punitive exit fee and the possibility of young workers opting out of workplace pension contributions (undoubtedly worth more in the long run than the government’s 25 per cent bonus). I have explored all these dangers, and the need to address them urgently, here.
But that doesn’t mean the Lisa is redundant. It has many advantages over a traditional pension for those who use it smartly. It is more flexible, a lot easier to understand and allows for greater competition when consumers have the option to move around their funds. Rather than tearing it down, perhaps it should be the building block of a new, more enlightened and progressive retirement saving scheme. Some have even suggested that the LISA should be brought into the workplace and given the same employer contributions and tax relief that currently apply to pensions, including Scottish Friendly.
I’d be all for that, so long as we had financial advice as standard in the workplace, with employees being referred if they want to withdraw their LISA funds on a whim or as a a result of a pressuring partner, for instance.
There is an uneasy feeling among young people that huge amounts will be wasted on renting rather than put into a fairly solid investment that doubles up as a secure and much-loved home. That’s why, for many people, the money coming out of their pay packets every month under auto enrolment could, in time, prove unpalatable.
It doesn’t help that the financial industry often gives blanket advice to put every spare penny into either an occupational pension scheme or a private pension without any consideration of our personal circumstances (such as; do we have savings or debts we need to pay off?)
Prioritising property over a pension
Few people my age understand the tax benefits involved with saving into a pension; certainly they are harder to grasp than the simple tax-free status of ISAs, a consistently popular savings vehicle among 20- and 30-somethings even if interest rates leave a lot to be desired. It’s not the tax advantages that necessarily draw young people in, especially now we have a big tax-free personal savings allowance, but coupled with the more obvious language of “bonuses” that have become synonymous with recent governmental initiatives to get us saving more, I totally get why Help to Buy and Lifetimes Isas strike a chord.
Plus, what about all the other directions that young people can now take with their savings and investments, thanks to the world of choice now offered online? From share trading and bitcoin to property crowdfunding, the traditional financial industry has to accept that it is competing with a whole range of options that weren’t available to the general public even ten years ago, let along the ancient heyday of pensions offered by paternalistic employers. That is not even taking into account the rapidly changing nature of work, with young people shunning corporate career ladders for the self-employed revolution. If you fall into that camp, the only really credible way to save for the future (in my eyes) is investments – the precise how and what is not as clear (although I think the LISA is a boondoggle for the self-employed), but the value, choice and freedom offered by investments compared to private pensions is self-evident.
They say that ignorance is bliss. This seems to be whole philosophy behind auto-enrolment, which “nudges” young apathetic savers into a pension. But if young people are saving into a pension through ignorance, it won’t prove so blissful when inflation starts filtering though into their pay packets, the housing ladder keeps running away from them and if they find out that contributions will go up to such a level where they’ll really be felt in the here and now, but not such a level that they would make a meaningful difference in retirement. Surely the worst of all worlds?
So no, I don’t have a pension right now. Around six years, I put my money towards buying property with the help of my parents and have paid off a mortgage (an achievement which involved a fair degree of scrimping and saving, but which has left me immeasurably better off). I took the decision with my parents last year to invest in another property in Kent, for personal pleasure as well as for investment, which was achieved on my part through a decent five figure sum in savings and a little investment portfolio on the go. And it doesn’t mean I’m not saving for retirement. I’m self-employed, so the Lifetime Isa really helps people like me who would otherwise baulk at taking out a private pension. All in all, I feel optimistic about my financial future.
And I can’t help but compare my situation to that of a former colleague who admitted that saving into a pension for 16 years will only bring £9,000 in income at retirement due to her “tiny” salary. Already in her late thirties, she feels like it has been “hard work for no reward”. Need I say more?
I know some will believe my circumstances are exceptional, particularly since I am a freelancer who had help from the famous BOMAD (Bank of Mum and Dad) to get on the housing ladder. But I am certainly not alone. There will be many young people out there who have parents that can and will help them get on the housing ladder.
That’s because many baby-boomers understand that we simply can’t achieve financial prosperity on our own anymore, and that a shared family approach to solving big financial conundrums at an early stage gives young people a chance to build up something (anything) of their own. I may have had help early on, but ironically it has helped me stand on my own two feet far sooner than if I had been pushed into expensive renting, leaving me with very little to save or invest for my future.
I do accept that those who save into a workplace pension scheme do at least benefit from money paid in by their employers. However, minimum contributions are – and will continue to be – so puny as to bring the entire auto-enrolment project into question. What is the point in opting in employees if they are liable to opt out when the going gets tough, or their contributions will never be enough to fund a truly happy retirement?
Either we find a way to meaningfully increase contributions at either end (which seems unlikely) or we instigate a well-rounded, far-reaching and holistic financial advice revolution in the workplace to open up young eyes to the panoply of saving and investment options at their disposal.
Some might think that’s a pipe-dream, but with the state pension getting trimmed back with every government manifesto, it could be the only way of guaranteeing a humane retirement for all.
What do you think? Tweet @ionayoungmoney or leave a comment below…