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Are pensions the right way for young people to save?

Locking your money away for over 30 years isn't an appealing prospect for most people, and especially when you have other financial hurdles to jump.

 

by Michelle McGagh on Feb 01, 2013 at 09:00

Are pensions the right way for young people to save?

The government is trying to get us to save more for our old age but are pensions the right way for young people to save for their future?

Research by the Centre for the Study of Financial Innovation (CSFI) into young people’s attitudes to personal finance reveals some feel confident, some intimidated and others bored by money matters.

That's not surprising, perhaps. What is unusual is that the study of 18 to 25-year-olds shows more people than you might imagine are actually saving. A total of 73% of people had more than £500 in savings and 59% had £1,000 or more.

Savings are easy to understand, if you want to buy something substantial, such as a car or house, then you need to save up enough money to put down a deposit.

Considering the state of the mortgage market and the expense of property, it is surprising that 40% of young people think they will be able to buy a property in their 20s (the average age for non-supported property purchase is currently 38).

However, when it comes to pensions young people are not as engaged. Although 76% agreed that pensions are important, just 30% are contributing to one.

Of those who do contribute, 42% have no idea what type of pension they have.

For young people pensions are seen as inflexible and irrelevant, it is something they can put off; 60% of respondents expected to be able to pay into a pension in their 20s compared to 93% who said they could contribute in their 30s.

A pension is something that comes later in life, there are still many monetary hurdles for young people to clear.

The author of the report Sophie Robson, who is 25-years-old, said: ‘I find it very difficult to think ahead to 35-plus years’ time when I might want to retire. The next significant steps in my life will be marriage and children, and even though they seem very far off now, they are much more tangible in retirement.’

Locking money away for over 30 years is anathema to young people who have not yet purchased a property or paid off their student loan.

This lack of retirement saving might be construed as irresponsible but the real question is whether pensions serve the needs of younger generations.

The idea of accessible retirement savings that are a hybrid between a pension and an ISA could be one solution. Pension expert Michael Johnson has called for the introduction of a combined allowance of between £30,000 and £40,000 a year for pensions and ISAs and each year you would decide whether to contribute to a pension or ISA and receive the relevant tax break.

There are arguments against this, mostly that you could end up accessing all your pension money and rely on the state in retirement, but controls could be put in place to prevent that.

The point is that young people don’t like pensions, they have too much debt to pay off and too many other things to pay for before they think about putting away money they can’t touch.

It’s all very well asking young people to save but financial products have to move with the times and adapt to fit the circumstances of young people.

26 comments so far. Why not have your say?

Keith Cobby

Feb 01, 2013 at 09:14

Pensions are fine if you are in a good company scheme or are a higher-rate taxpayer. Otherwise the ISA is better.

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TJLamb

Feb 01, 2013 at 09:44

I have stakeholders for my two teenagers, but am not sure whether I'm a 100% happy about the choice/decision (I also invest heavily in Isa protected investments).

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Anonymous 1 needed this 'off the record'

Feb 01, 2013 at 10:15

one big problem with ISAs,

Want a car - raid the ISA

Getting Married - raid the ISA

Kids come along - raid the ISA

1 Kid goes to Uni - raid ISA

1 Kid buys flat - raid ISA to help with deposit

Boiler blows up - raid the ISA

Kissed off with UK weather, need holiday sunshine - raid the ISA ( did this more than once)

etc etc

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jeffian

Feb 01, 2013 at 10:43

"For young people pensions are seen as inflexible and irrelevant, it is something they can put off......A pension is something that comes later in life"

No! No! No! No! No!

I'm not going to get into the Pension vs. ISA debate, but it is incredibly important to stress to youngsters the importance of saving and, particularly, to spell out that the wonders of compound interest make the earliest contributions by far the most valuable so it is not something that "they can put off.......and comes later in life".

Like TJLamb, I took out stakeholders for both my children as soon as it was allowed. The point I make is that initial contribution of £2880 by me, grossed up by the Government to £3600, if paid at birth will have turned into around £86,000 (assuming 5% pa growth) by the time they reach 65. The same contribution made at 50 would have turned into just £7,500.

I think it's right that pensions have suffered a bad press due to their inflexibility and the regulations governing annuities but as I continually point out to my (unimpressed!) children, when the day comes, they'll be pleased they have something rather than nothing.

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The ssinnic

Feb 01, 2013 at 10:50

The big con is the tax "relief" syndrome, whereby they "give" you tax enhancement while you are young, foolish and innocent, and take it back if you are alive, old and wise, and when dead take another chunk as well. You save...they prosper!

Pensions are for the wealthy high tax payers only. You'uns! Beware and Avoid!. Holes in the garden and other simple ideas spring to mind!

Try and avoid anything that governments interfere with is so-called 'best advice'!

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jeffian

Feb 01, 2013 at 11:13

Well put your £2880 in a hole in the garden and see where that gets you when you retire! If you really can't stand the rules around pensions, then go the ISA route (foregoing tax relief on contributions for flexibility) but the point remains the same - the earliest pounds saved are always the most valuable.

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Alex McLaughlan

Feb 01, 2013 at 12:21

Agreed, jeffian. It's an old, but true, saying - the first pound in is the biggest pound out.

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Geoff N

Feb 01, 2013 at 13:20

The government has a habit of changing the rules on pensions at will.Consider ;

1. The abolition of the 10% tax credit on dividends and the effect this has had on private pension funds.

2. The constant tinkering with total annual pension contributions and lifetime pension limits

3. Basic 20% tax relief - is this guaranteed to continue for 20 years or more?Your guess is as good as mine.

4. Can anyone feel totally confident that the state retirement pension will not be means tested in the future.Extreme but can you trust any government especially when finances get tough.Pensions have been seen as an easy target in the past.

If you are lucky enough to be able to join a company pension - join it while you can.These cannot be beaten as you employer will also contribute.If you are a higher rate tax payer then private pensions are worth having because of the higher tax relief.It's a case of balancing the existing rules/benefits,what could happen in the future and the certain ease of access to investment ISA funds.

Personally if you're a basic rate tax payer though and there's a choice between a private pension and an ISA,I would take ISAs everytime,Reasons;

1.More flexibility on access to funds and hence also the ability to do something else with your money if the government changes the rules in the future.

2.No 20% basic tax relief on contributions however at present tax can be reclaimed on investment funds paying interest within an ISA.Invest in share funds when you're younger and transfer these to a corporate bond fund or distribution fund later,on which most you can reclaim the tax credit.

The rules on all investments can be changed at anytime including everything I have said above and in say 5 yrs time the government could have made pensions considerably more beneficial.We can all live in hope.

Ok you have to be much more disciplined with an ISA because of the ease of access but if you don't have that discipline with a pension and only end up with a paltry sum,then what was the point in it all anyway?

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Tortoise

Feb 01, 2013 at 15:02

A pension fund is not for basic rate self funding taxpayers. The only winners on this are the government, who will get back rather more than the tax "relief" they gave you in the first place, and the pensions industry. At present annuity rates you will have to live 17 years just to get your own money back, or 22 years after tax. Who has the use of this money for those 17 years? The pensions industry. Who gets to keep the balance if you do not survive these 22 years? The pensions industry who will have to pay tax to the government on their profits.

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P Cash

Feb 01, 2013 at 16:30

Why take out a pension when you have to buy an annuity with it, which is dependent on annuity rates when you get much older, and also that annuity dies with you.

Fund managers love pensions because it gives then shed loads of our money to play with over the long term and allows them to earn huge bonuses by looking after our money.

Saving and investing for retirement is crucial, not convinced that a pension is a good option though.

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Luckycontrarian

Feb 01, 2013 at 16:46

I wish someone had sat me down in the first year of my graduate job and explained the key points (good and bad) of equities, bonds and bank accounts. I started a SIPP aged 33 after 10 years of horrendous company pensions and have never looked back. I can't help thinking the negative views on pensions come from historically expensive and poorly administered schemes, whereas in reality many self-invested schemes are much easier to understand, charges can be low (or zero), with full transparency of holdings. I have the same view of cash & stocks and shares ISAs - all it takes is a little understanding, an interest in the world around you and an open mind and I can't help thinking the pensions and savings world would be in a much healthier state.

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The ssinnic

Feb 01, 2013 at 17:04

@jeffian

Sounds to me as if you've really been given the treatment by the insurance industry...try thinking outside the box chum!

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TJLamb

Feb 01, 2013 at 17:26

Luckycontrarian,

I'm glad you have things sorted out, but can charges really be zero?

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wayne roberts

Feb 01, 2013 at 17:28

No, pensions aren't the right way for young people to save, what young person in their right mind wants to think about pensions? Its like asking them to save up for their nursing home fees or the cost of their funeral, pensions are just associated with old age and most young people have the optimism to think that they will be one of the few who are so successful they won't need a pension, asking them to save for a pension is like telling them to admit they are going to be poor in later life, not really a very attractive prospect.. I think the word 'pension' is the biggest problem.. personally I prefer to manage my money and to be able to get hold of it whenever I want it, having it locked up till I'm 70 or whatever age I will be allowed to have it doesn't sound very attractive, what it will get spent on when I'm that age doesn't even make me want to save it, let the taxpayers of the future pick up the bill the same as we are paying for the current pensioners..

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Dividend Income investor.com

Feb 01, 2013 at 17:55

Unbelievable comments, above!

Get used to it pension saving start at birth.

Why dismiss the governments annual contribution? Cut out the useless birthday, Christmas, etc presents given to your kids. Instead club (your family and friends) together and deposit £2880 in a low cost SIPP every year.

Teach your (grand)kids proper money saving and investment habits, so they will continue with their ISA and SIPP contributions once they start earning.

If you require guidance on all this, I recommend you read this concise eBook, at: http://www.littlesavvyreports.co.uk/helping-your-children-to-get-rich/

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rik

Feb 01, 2013 at 18:09

Perhaps It is time to stop engageing in the ISA/pension debate. Perhaps we should not talk about 'pensions' at all, but instead talk about 'provision for when we cannot earn an income'. A bit of a mouthfull I know, but isn't this really what we mean? And of course, there will be as many answers to the question of how to create this provision as there are individuals who consider it.

Even ISA's have there costs. Perhaps 1/2 % annual charge on a Self select ISA. And for what benefit? If the provision that you need can be provided by dividend income and capital gains realised within the CGT limit, then an ISA has no benefit to an unwrapped account.

I must say IMO the only rationale for an ISA is to deposit cash, and even then only if you can get a decent Interest rate (impossible at the moment).

If, however, you have pots of excess money then all these schemes become usefull in some form or other, for reducing your tax bill, and increasing the amount of extra cash you can pass on when you are dead.

My apologies for the somewhat negative tone in this post. I've had the builders in for the last month and its getting to me!

Rik

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Maverick

Feb 01, 2013 at 18:11

I have opened SIPPs for my two daughters, paying into them the monthly allowances I used to pay them when they were at university. Now that they both have jobs, albeit low-paid jobs working for charities, they do not need the allowances to live on.

However, having been a pensions lawyer for 20 years, I am very much aware that every £10 you save in your 20s is worth £100 in your 50s, because of compound interest. My daughters can't afford to make pension contributions, but I can (just - I'm now retired!). I have invested the money in investment trusts.

The great thing about putting the money into a SIPP and not an ISA is that the girls can't get at it to buy that fabulous pair of boots or a new summer dress. They get the tax relief on the contributions, not me.

I'm not advocating this for everyone. I'm just saying that it stands a chance of producing a reasonable pension for them when they get into their 50s.

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rik

Feb 01, 2013 at 18:18

@Maverick

This reminds me a bit (just a bit) of the 'policy' my parents paid into for the first 18 years of my life, which they duly handed over when it matured. I remember it well, the proceeds were enough to buy me a new suit.

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jeffian

Feb 01, 2013 at 23:13

@thessinnic,

"Thinking outside the box"?! Blimey, haven't heard that one since 1985. Well run this one up the flagpole and see if it flies. Your one thought "outside the box" seems to be to to put your cash in a "hole in the ground". Hmmm. Not convinced about that one. All I've advocated is that the young should be encouraged to save and provide for themselves in old age and that a) the earlier they do this the better and b) it is much better to do that in a tax-free environment - be that pension or ISA. If you have a better solution, let's hear it.

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Colston Hicks

Feb 02, 2013 at 13:20

In 1940 I started my first pension at 19 simply because my Father and Mother were living comfortably on my Father's pension.

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Maverick

Feb 02, 2013 at 20:29

Rik - Considering that the SIPPs (which have only been going for a couple of years) are averaging around +10% a year, and that I'm monitoring the SIPPs, they should buy the girls a tad more than a new suit.

I'd rather trust my judgment than the judgment of an insurance company any day.

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The ssinnic

Feb 02, 2013 at 21:17

OK you insurance guys! This is what happened to me...and when you've read this you'll realise why I have the name!

1985. Invested £5000 in a with profits pension with Pr*****! 1990 , on 'professional' advice: value on encashment £4974. Reasons...expenses...long term discounted..., bad stock markets...and all the rest... you insurance guys have akll the terminoligy! Bul***T ...Bulll....T

And compare it with this:

1985 opened a business on my own with £4000. 1990- sold it for £480000! YES ! that's what I call pension investing!

And you ask me why it'sa good idea to give these Citygent prAtS your money?

Get out of the Box and grow up in the real world and just learn this:

"You are on your own, my son!"

Suckers pay the rent!

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The ssinnic

Feb 02, 2013 at 21:46

@ Maverick

You bet .....and I would bet thousands would say the same if they only knew the big con this industry is built on!

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Luckycontrarian

Feb 04, 2013 at 14:40

@TJLamb - I don't buy funds or trusts, preferring individual equities and bonds so whilst there is the spread of the investment and commission to factor in, there are no annual management fees and no admin fees. I do find it crazy that people can set up a SIPP with a £600 annual fee or set one up with no annual fee as I have done. In theory I suppose the cost depends what you want to invest in (eg vanilla equities or bricks and mortar) but with the right research you should only pay for the services you actually use.

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TJL

Feb 04, 2013 at 18:15

Ah, right, see what you mean.

I am probably paying about £2250 p.a. in commission - something I'm working on.

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Roger Bailey

Feb 22, 2013 at 19:13

Pensions are not finished, but except for the State Pension, should be. The government should end all tax relief on contributions and add the employers contributions to the employees wages. Together with housing benefits for the poorest pensioners the savings (about £50 billion) would allow for an 80% increase in the basic State Pension (enough to pay for basic accommodation)aswell as basic living costs).

Allowing 30 to 40 thousand pounds per year to be put into ISA's is far too generous and unnecessary as it is far more than the national average wage., current levels are sufficient.The government needs tax revenues now if they are to decrease borrowings.

Recently, Richard Branson stated he wanted to give a substantial part of his wealth to Charitiies. Problem with this is the State has to subsidise this from general taxation. There are certainly some very good charities such as RNLI,RNIB, Macmillans, Hospiscare but it would be much more economical if the Governemnt stepped up to the mark and provided the services they provided.

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