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Should young people save for their pension or a home?
Young people will increasingly be making the choice between owning a home and saving for old age.
by Michelle McGagh on Feb 17, 2016 at 15:27
Young people are stuck between saving for their pension or trying to buy a property and will be forced to rely on their home to fund their retirement.
A quarter of people are already dipping into the equity in their property to fund their retirement and this number is expected to grow exponentially as younger generations rely more heavily on property to subsidise their later life.
Steve Jenner of Henderson Global Investors warned there was a huge problem being stored up as individuals cannot afford to fund a pension and buy a property.
‘Increasingly, the younger generation will be able to save for retirement or for a home, and not necessarily do both, so this reliance on your home as a [retirement] income source will continue,’ he said.
Despite the introduction of auto-enrolment that will see as many as nine million workers saving for the first time, there has been criticism about low contribution rates. Although people will be saving 8% of their salary by 2017, this is still not enough to guarantee a decent pension.
Jenner said the move away from defined benefit (DB) pensions, which provide an income for life based on a multiple of years worked and a percentage of final salary, towards defined contribution (DC), where a pension pot is received based on contributions and stock market performance, had exacerbated the issue.
He believes there will be a ‘tipping point’ in 2035 when the last of the babyboomers with DB pensions have retired and ‘those 40 or 50 somethings have a real risk of being underfunded [in retirement]’.
Dean Mirfin, a retirement expert at Key Retirement, said younger generations would have to rely on property ‘one way or another’.
He believes that while auto-enrolment is beneficial, especially to people in their 20s who may not be looking to buy a property just yet, those in their 30s could opt out of saving in order to put money towards a home.
‘The reality is, in the future, pension provision will be based on the level of contribution set by auto-enrolment,’ he said.
‘What we do not know about this point in time is the opt-outs for younger people, who may not be thinking about buying a house now [and are willing to save]…but when they hit 30 and home ownership becomes a priority, will we start to see a change in [pension] funding.’
While the ideal scenario is that young people save for a pension and a deposit on their first property, Mirfin said this was unrealistic for the majority and saving for one or the other brought their own problems.
Failing to buy a home and building up a pension means paying rent in later life, which will run down the pension fund quickly but reaching old age without a pension means you are reliant on just one asset – your home – to fund you, possibly for decades.
‘When it comes to renting [and building up a pension] or buying a home at the expense of your pensions, most people will favour buying a home,’ he said. ‘At least you are securing an asset that you can make liquid again, and in the future I think people will view their home like that.
‘The home has value and it’s not too bad to rely on it, your house may well be your pension.’
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