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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
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.
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