22nd July, 2016
Pension saving from the view of a young adviser: not your average Friday night conversation topic…
The standard Friday night quick-one at the local normally entails a cold beer and some easy going conversation with friends. It’s a nice break from the challenging world of financial planning.…or it can be! Last Friday was slightly irregular though.
My group of friends in the main range from late twenties to early thirties. Increasingly they are talking of retiring in 25 years or 30 years’ time, many haven’t bought their first house yet, let alone given much thought to how they will fund their retirement! Having said that, they use their parents as a barometer, and this is really where the conversation turned interesting. As it transpires, my peers felt frustrated that they did not have the same opportunities as their parents. No longer is housing as easily affordable as it was 30 or 40 years ago. The pension schemes have changed, there are no longer prospects of guaranteed pension benefits, even from the largest employers, so retirement planning is dependent upon the individual to set aside an appropriate amount. My group were complaining about saving for a deposit, the pressure to travel whilst they are young, and live in a world where the latest technology gadget ramps up the pressure to communicate. All of which are higher up on the priority list than setting aside £200 per month into a retirement plan.
So the conversation developed. Are today’s generation much worse off than their parents? We concluded that the short answer is yes, not in every respect, but there are some key challenges young people face when saving for their retirement. My friends don’t really have an understanding of pensions or savings, they didn’t know (why would they) that the State Pension age for a 25-year-old is currently 68, which is only likely to be pushed further away in the future (as opposed to 60 for a 25-year-old 40 years ago). Spending habits are also very different than previous generations. How many of the current crop of 65-year-olds do round-the-world trips at 18 or spend much of their income on ‘buy now pay later’ deals? The world of credit, (borrowing against future income streams), has accelerated standard of living, and if abused can cause problems, as it allows immediate access to things previous generations couldn’t access. It forces priorities, let’s see, trip to the Far East next year or £200 per month into a pension plan? Tricky one. Accessible credit, (that’s a whole new blog in itself), has been and will remain a key ingredient in global growth, and the use of it has helped many of today’s retirees leverage against cheap assets, resulting in price rises, and ultimately the difficulty in my friends now being able to climb up the first step of financial planning, which is typically home ownership. So, many of my friends will continue to rent rather than buy a property, meaning that they will not benefit from rising asset wealth, and downsizing will not be a way of releasing capital for their retirement.
Inevitably conversation turned to the bank of mum and dad as a central form of planning. Now this is an emotive one, because not all parents are in the same position, either financially or in terms of willingness to distribute. Demographics aren’t helping either; more and more of our parents are living longer and their wealth is being swallowed by long term care fees. Obviously, with my day job I had a considerable steer on this discussion, but it started to feel like another day at the office. We even got into the discussion about pensions being rubbish and not good value as the pension dies with our parents, seemed the populist view. This is of course, so not true, or at least it doesn’t have to be if you understand planning. And therein lies the key. Education, education, education. If you don’t know what you don’t know, in any aspect of life, then progression will be tough. Forming an effective plan becomes even tougher. We concluded that things are different than they were. That can be an excuse, or it can be an opportunity. As ever, in the absence of good luck and good fortune, failure to plan, will result in failure to achieve our planning objectives and that’s the same if we are 25 or 55. The key is to understand your options, and prioritise. Whatever your age, there’s no time like the present.