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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

Should young people save for their pension or a home?

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.’

35 comments so far. Why not have your say?

underscored

Feb 17, 2016 at 17:21

Lol. Living standards continue to collapse for the young.

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Redundant (Old Timer?)

Feb 18, 2016 at 10:50

The solution is simple - Let the young save into a pension but design a product where they can use the pension fund as security for the deposit on their home.

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mark antrobus

Feb 18, 2016 at 15:14

Cowardly governments in collusion with the retirement vote have consistently fleeced the young with high taxes, university tuition fees, the effective abolition of defined benefit pension schemes, grossly high house prices and the end of job security. In a nutshell, having had all these benefits themselves while keeping the retired of their day in poverty, they have drawn up the drawbridge on those that follow - for what reason? To pay for a retirement welfare system of unprecedented generosity for themselves that will not survive to the next generation.

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dd

Feb 19, 2016 at 10:32

"...retirement welfare system of unprecedented generosity for themselves..."

Precisely: welfare!

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underscored

Feb 19, 2016 at 14:26

Those boomers that live into old age, will live to reap a very bitter harvest. The demographics are shifting and the vote scroungers are preparing themselves http://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2015/intergenarational-fairness-launch-15-16/

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dd

Feb 19, 2016 at 15:56

That's interesting, underscored. I hope that conclusions are not reached on the basis of yet more generalisations. It is not difficult to see that people's circumstances vary greatly, even amongst the boomers. One of the most significant distinctions is: DB or DC pension?.

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croppp

Feb 20, 2016 at 09:57

The housing problems for young people .must be a put on the goverment ajenda for action in the near future.small village`s are now mini towns with rapid congestion being the norm .so whats the answer .people like to see green fields a kind of therapy. but if you examine districts and how to plan using these green area`s for housing just having waves of housing .a brick jungle if you like ruins the therapy .in this country their is a lack of woodland to counterbalance this brick jungle .so new thinking has to be brought into play first designate an area and plant trees to break up depressive brick jungle attitude and then allocate fixed area`s for housing .many fields are overgrown with lack of attention an eyesore so losing fields to this planned development could go through and be a asset .

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underscored

Feb 20, 2016 at 11:09

@ crop. Supply is not the problem. Speculative demand is. Re-introduce council housing, ban IO lending, properly tax BTL, restrict mortgage lending to 3x salary, CG tax primary residence. Fixed.

Longer term investment may return to economic output, you never know...

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mark antrobus

Feb 20, 2016 at 11:53

The housing problem arises from too many people in too small a space. This is elementary demand and supply. This is why it is so vital to prevent wide-scale immigration from the EU - the concept of free movement of people was designed at a time of economies with broadly equal wage and unemployment rates so the movements in and out of each country would be equal. And supposing we did turn more and more green fields into housing estates - what then? Apart from losing the countryside we would still not have solved the problem because people would still keep coming.

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croppp

Feb 20, 2016 at 12:27

The population is expanding so more housing is needed immigration will cease when the country votes .i think the vote will be 55% for coming out .land is expensive so houses that are built will be still out of the range of young couples rented property looks to be still available and is being held by the wealthy which control`s rents and forces rental higher.

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underscored

Feb 20, 2016 at 15:38

No. House prices are a function of lending and demand for lending https://medium.com/@neweconomics/why-you-can-t-afford-a-home-in-the-uk-44347750646a#.5yafqymtj

https://positivemoney.org/2014/02/house-prices-wages-kept-wed-earn-44000/

Building houses fixes nothing when speculative demand is infinite. See Spain, Ireland and China prior to their houses busts. http://www.forbes.com/sites/kenrapoza/2015/07/20/what-will-become-of-chinas-ghost-cities/#3d440e53751b

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croppp

Feb 20, 2016 at 16:17

The probability is that supply and demand is only any good if demand for an item in this case housing becomes so important for a roof to live under that the population votes people in that care about the uk .ukip can be that party mr farage the uk leader thinks more for briton than many other leaders .

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underscored

Feb 20, 2016 at 16:52

This is not a supply problem. It is a demand problem. Just like fracking being a solution to a demand driven by speculation. We don't need a fracking solution, we need sensible credit conditions based on income and end credit fuelled speculation.

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mark antrobus

Feb 20, 2016 at 21:04

It is implausible that speculation is the main cause of high house prices. Speculation is only a main factor in areas such as prime central London, and would be evidenced by properties left unoccupied. But there is no evidence that speculators are buying up typical semi-detached houses or flats in the suburbs en masse. This is not so say that the lowest interest rates since the foundation of the Bank of England have not played a part, to the extent that they make monthly mortgage payments cheaper, but this is not speculation. During the banking crisis UK property values temporarily fell due to unavailability of mortgages, but were underpinned by a high density of population in relation to limited supply. If you look at house prices in London they are generally both the highest in the country and still growing faster than the average. Why? What would anyone expect to happen if you take a city with a fixed amount of land and therefore a virtually inelastic supply of housing and keep cramming in more and more people, at a factor of about 15% - 20% per decade? Many other locations are the same.

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underscored

Feb 20, 2016 at 21:24

"But there is no evidence that speculators are buying up typical semi-detached houses or flats in the suburbs en masse"

Are you for real? Come to my town, every single entry level property I have looked at (20) since 2013 have been put out for rent, at a price that cannot be generating meaningful cashflow. That is SPECULATION ON FUTURE CAPITAL GAIN.

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mark antrobus

Feb 20, 2016 at 21:57

I don't think that 20 properties in one location can represent the national picture. And if these properties are being occupied - which you implied they are - then even for these 20, they are not actually taking away properties from occupation. If your argument was correct - that it is all down to speculators, then the rents would be LOW - but across the country rents are also sky high.. In general terms high rents have the same cause as high property prices - too many people leading to excessive demand in relation to limited supply, itself resulting from a country with one of the highest densities of population in the world apart from some notable city states.

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croppp

Feb 20, 2016 at 23:06

A comment on rental property many places that sell houses also now have thriving rental concern attached to their offices .this seems to be increasing .houses that before came on the market to be sold many now have a sign saying for rental with the company sign .what i think sparked this of this started several years ago when homes where on negative equity because they bought expensive and for a time because of the loss rather than lose money .they placed their homes on rental .from that point the money people with investments started to jump on the band waggon so to speak which forced rents up and denied people that where looking for a home houses that ceased to be in the stream .big incomes now can be generated from putting their money in a safe haven of property.vastly cutting available homes to needy couples and newly weds .

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underscored

Feb 21, 2016 at 08:59

Indeed croppp. A house rented out is one less for sale. They tend to be ftb territory too.

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croppp

Feb 21, 2016 at 10:56

Estate Agents have built up rental buisness which has caused a housing shortage and created lack of supply which in turn has driven up house prices.speculators seeing this new way of making easy money have taken this a stage further putting vast sums of money into the system creating even further shortage of available homes to buy .when it was possible for people to go and buy a home at a price they could afford this system worked and a steady stream of homes was available ,but now a different story this steam has been cut back so much that available houses have become to expensive for many people to buy.

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Mark22

Feb 21, 2016 at 13:43

The original assumption in the article is that "the young" can't afford to save enough to buy a house and have enough for a reasonable pension. I think this is wrong. Having somewhere to live is essential and, once the mortgage is paid, the money previously used to pay the mortgage plus whatever increase in equity in the property (assuming you downsize) can be used to fund the pension.

The wrongheadedness is that saving for a pension has to be a long term activity. This is only the case where company contributions are limited and not equal to an individuals contributions at any point.

Buying a house and paying off the mortgage as quickly as possible is the way to achieve both a property owning society and decent pensions.

BTW its only relatively recently the UK has become a property owning society so a rental society has worked in the past.

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croppp

Feb 21, 2016 at 14:24

A rental society only works for families that can afford to pay the high rents i know from my relations two members who have to move around not staying homes very long because of increasing rents .various levels of income suit various wage earners .16k a year 20k a year 25 k a year 30 k a year and so on .16k a year where do you live with that .that only on par with the minimum wage .when a system that we have in the uk starts to fail people people in the higher income group only see the financial conditions they live in and then base their views on that . for any system to be fair a husbands wage should include a mortgage food fuel and a little put by for a rainy day .our system because of the money reguired to live in a house and the lack of control by goverment now makes owning a home a dream .with a lifetime of struggle ahead .

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underscored

Feb 21, 2016 at 15:27

"BTW its only relatively recently the UK has become a property owning society so a rental society has worked in the past."

Worked for who? https://history10c.wikispaces.com/Slums+%26Tenements

The more nonsense I hear from your generation - who by the way were perfectly happy for the generation that built your wealth and fought in a world war or two to live in abject poverty in old age - the more I would welcome your time in penury to teach you all some humility.

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mark antrobus

Feb 21, 2016 at 16:39

Both high rents and high house prices are the product of the same thing - overpopulation in a crowded piece of land that means housing supply is tight. Although it is often wrong to distort markets because of the distortion of free choice, if homes are diverted from owner occupation to renter occupation there is still the same number of homes. So this cannot be the cause of the housing shortage. It is interesting who is really benefiting this policy of high EU immigration that drives up house prices - certainly not the young who cannot afford to buy a home - or even rent one. But then they don't vote so much so in the eyes of vote chasing morally bankrupt politicians they don't count.

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croppp

Feb 21, 2016 at 16:58

Much has been said and will continue to be said about about who can afford to buy in this present climate .the fact remains that to purchase a home a 2.5 bias earnings to salary is required so to buy a home of 120k you need to earn 48k

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Dennis .

Feb 21, 2016 at 20:05

In 1971 I was a PhD student and living in a University Hall of Residence. Across the road was a building site with a sign "3 bedroom detached houses from £3,500". The next year I got my first job starting at £2000 /annum. Can you imagine that sort of multiple now?

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underscored

Feb 21, 2016 at 20:56

According to the latest Government home survey (2014-2015) [1]. "Rates of overcrowding remained low but under-occupation increased,

driven by an increase in the proportion of under-occupied homes in the

owner occupied sector."

So we have under occupation of houses.... UNDER OCCUPATION and 10s of 1,000s houses vacant in london [2]

This is a massive financial crisis - F all to do with the needs of sheltering people. Market failure. Building more houses will achieve nothing - except boosting house builder profits.

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/501065/EHS_Headline_report_2014-15.pdf

[2] http://www.theguardian.com/society/2016/feb/21/tens-thousands-london-homes-deemed-long-term-vacant

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underscored

Feb 21, 2016 at 20:56

oh and other than London, rents are static... "While social rents increased between 2013-14 and 2014-15, private rents

remained stable. Although this was not the case in London."

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/501065/EHS_Headline_report_2014-15.pdf

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croppp

Feb 21, 2016 at 21:00

In 1970 i worked in the building trade a brickie i worked on many building sites one i remember was near where i live that was an estate and was built straight into a green field area rowlinson construction that estate still has green fields as of 1970 terraced houses on the site was a 2.8£ thousand pounds the semi detached houses went for 3.5£thouand pounds the houses now are around 220£ thousand ponds and some much more. wages where from 20£ to 30£ i worked on peicework this was the normal way of working no work no pay with plenty of hardship in between.

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mark antrobus

Feb 21, 2016 at 21:51

Whilst 22,000 homes being empty is a problem there always has been such a problem and it is ridiculous to imply this is the cause of escalating housing costs. This figure needs to be put into perspective - London's population which is already 8.6 million, having increased by 2 million in 25 years and projected to reach 11 million by 2015 ( http://www.bbc.co.uk/news/uk-england-london-31082941). So it must be obvious that even if all of these 22,000 homes were brought into use they would be only a drop in the ocean. Other cities, and even lother areas are facing similar problems. If the UK was not one of the most densely populated countries in the world already there would be an obvious solution of freeing up more land for building, although vested interests in maintaining high house prices would strongly resist. The only solution for the UK is to stop the free movement of labour from the EU - which incidentally, whilst being one of the most pressing economic problems faced by UK residents, was not even on the table at the recent EU negotiations.

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underscored

Feb 21, 2016 at 23:14

No Mark. I am not saying the empty houses are driving the problem. The problem of affordability has come from decoupling mortgage lending from wages. You remember self-cert (liar) loans on an interest only basis? The ones that trashed the Global Banking system. Yes they are still a problem now. Remove excess demand - i.e. speculators, be they foreign or BTL, remove IO lending, and re-establish the link between wages and lending. Viola - no crisis of affordability and no insane housing benefit bill.

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Rob Walker

Feb 22, 2016 at 21:47

This is a quality of life question posed by the vultures of financial services. If you have nothing better to do than save for a pension when you are under 40 then there is something wrong with your life and your ambitions. There should be some overriding desire to get a better house, take your family on an extra holiday or even buy yourself that guitar you always promised yourself instead of shoving more of your hard-earned cash into a pension. If you have lost those ambitions before you are forty then you are in for a very dull retirement....but you will be able to afford to join the golf club !

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mark antrobus

Feb 22, 2016 at 22:23

As stated by Rob Walker 'If you have nothing better to do than save for a pension when you are under 40 then there is something wrong with your life and your ambitions.' This is the very reason that up to recently it was the norm for most employees to be automatically enrolled into defined benefit occupational pension schemes, with what would now be seen as generous employer contributions. Such schemes overcame the problem as Rob alludes to that the average person would never be far sighted enough to build up sufficient pension rights if given a free choice. These pension schemes were probably the best in the world for employees, and almost certainly had much lower operating costs and ran at zero profit compared to the private schemes which are now the only option for most people. Whilst such schemes would have needed reform, they have in effect been abolished with effective approval from governments of both the main political parties, whose agenda has been driven by big business and the votes of the already retired, ignoring the needs of the young in particular who are a lot less inclined to vote.

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Rob Walker

Feb 23, 2016 at 09:36

Mark, I totally agree. A married man of 30 with a young family may well favour a career move to an employer with a generous pension scheme. But to put extra hard-earned cash into a pension instead of, say a better home, makes little sense. Later on in life AVC's might be attractive but not in the early years.

Finally, of course, by taking ownership in building a pension pot maybe a decision you're proud of later in life but, as those who invested in Equitable Life will confirm, it can also lead to deep regrets and recriminations.

Funny how the pension industry never dwells on that 'risk' eh?

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underscored

Feb 23, 2016 at 10:03

Rob Walker - I guess you have a DB pension of some sort?

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Rob Walker

Feb 23, 2016 at 10:23

For info., I had a few bits of pension up until I was 50. Once the mortgage was paid and the kids grown up I went contracting / self employed. I took advantage of the 40% tax relief on SIPP contributions and between then and 62 built up a pension. I reckoned no-one says on their death bed 'I wish I'd worked longer for a better pension' so I retired at 62 using the tax free lump sum to help me up to state pension age. Starting serious pension savings at 50 didn't hurt my pocket half as much as it would have done at 30 and all those things I spent that money on in the intervening years gave me great pleasure.

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