It is vital for young people to engage with pensions early on in their careers if they are to reap the benefits in retirement. Yet, many are putting off contributing to a pension, finding them confusing and difficult to engage with. A recent Young Fabians Future of Finance Network event saw Gregg McClymont MP, Shadow Pensions Minister, tackle the issues surrounding young people and pensions, with a panel of pensions and financial education experts, including Robert Gardner, CEO of Redington, Vivi Friedgut, director of Blackbullion and Iona Bain, founder of Young Money, the UK’s top blog for Generation Y. So what did they identify as the key issues affecting young people and pensions, and what should young people be doing to ensure a comfortable retirement?
Firstly, it is all too easy for young people to see cash in ‘emotional’ terms, and this may prevent them from making the most financially sound choices. However, the super rich and very high earners treat money differently: they use their heads rather than their hearts when making financial decisions. By the same logic, young people should be contributing to a pension in their early 20s, in order to build up a pension pot, through a combination of compound interest, tax free contributions and employers’ matching contributions – in fact, research by Barnett Waddingham found that workers who wait until they are in their 40s to begin paying into a pension stand to lose out on nearly £100,000 just in ‘free money’ compared to those who begin saving when they are 25. When set out like this, it sounds like a no-brainer. But when the emotional factors come in, such as spending disposable income on for instance, socialising, discretionary spending such as eating out or shopping, young people quickly find that plans to put their money away become more difficult.
It is arguably even more difficult for young people starting out in expensive cities, particularly London. While most of the best career opportunities are to be found here, the cost of living rises to reflect this, particularly against a backdrop of high unemployment and the brittle economic climate. Therefore, when it comes to pensions, the best intentions of young people can often come to nothing.
Is financial education the answer? A lot of debate has centred around this, especially in the wake of mis-selling scandals and an increasingly difficult investment environment. There is certainly a lack of understanding when it comes to pensions. A recent report by the CSFI think tank found that more than 40% of young people who were paying into a pension had no idea what type they were paying into. Another study, in December 2012, found that young people expected to retire on a pension of £30,000, a tall order, given that a pot of £600,000 is needed for a retirement income of £15k a year. So it is very clear that there should be more awareness of the basics of pensions, the difficulty here is that financial education has only just made it into the National > Curriculum, and will take a while to see any correlation between this policy and increased financial capability.
What the speakers all agreed on, was a need for a change in financial behaviour. Good financial habits, such as ‘saving for a rainy day’ need to become more widespread again and basic money management skills, such as budgeting, can ensure that young people can both live within their means and enjoy the benefits of their saving once they reach retirement. Just saving a little bit of their income each month will help them to guard against poverty in old age.