Millennials Are Being Told They’ll Never Be Able To Retire. Here’s How To Future-proof Your Finances
When was the last time you thought about your pension? I’m willing to bet you’re already switching off at the mere mention of the P-Word. It’s fair enough. Pensions are hardly the most scintillating thing to read about. But, with recent studies suggesting the Millennial generation may be too poor to retire, and Royal London analysts estimating one in three retirees will still be renting, we need to get to grips with our finances sooner rather than later to have any chance of living comfortably into old age.
The savings gap
Obviously, we all think we are going to be millionaires one day. Or so the media like to report. But numerous studies have predicted a large gap between aspirations and reality – and it’s not just Millennials who are guilty of this somewhat optimistic thinking.
Reports from Equity Release Supermarket (ERS) demonstrate a huge gap between people’s pension aspirations and their financial reality – regardless of their age. A UK survey of 4000 people showed a clear disconnect between retirement aspirations and current financial provision for them, with 80% of under 60s admitting they did not know how much they’d need to live on in retirement, and 29% making no additional provision beyond their state pension, which is currently £164.34 per week.
Dan Wilkinson, Marketing Director of ERS, says the disparity between retirement plans and reality is a familiar theme.
“To live comfortably in retirement now, an individual needs to supplement a full state pension with about £12000 per year. For a 20-year retirement, this equates to a pension pot of £240000. The reality is that the average pension pot is little over £30000. Where do we think we’ll find the missing £210000?”
To close the ‘savings gap’, it’s necessary to save 5% more of every single pay check than we’re already doing. But when many young people are struggling to afford rent – let alone save – how is that realistic? Millennials and Generation X will be hit with longer working lives than any other generation before them but, without saving far more aggressively, they’ll still be left with paltry pension pots at the end of it.
Millennials and money
It can be incredibly frustrating to be painted as a generation who’d rather fritter away their money on avocado toast than save for their future. In fact, contrary to popular opinion, Millennials do save – they just need a little help figuring out the best options.
The reality is that Gen X and Millennials are far worse off than their parent’s generations. With 1 in 5 over 65s now classified as millionaires, the wealth disparity is huge. This group have seen the greatest increase in wealth over the past ten years – an incredible 96%. With stats like this, the rise of BOMAD – or ‘Bank of Mum and Dad’ – is unsurprising.
Dr Eliza Filby, a generations expert and historian, says we must stop trying to fit Millennials into the Baby Boomer straitjacket set by previous generations.
“Millennials will have very different lives and the previously available incentives – great savings rates and pension schemes – do not exist for them today. In fact, they’ve been actively dissuaded from saving or acquiring assets.
“Millennials still worry about their financial future…but they have a very different set of priorities – both short and long term – than their boomer parents. They would rather spend their money travelling when they are young, than saving up for the dream cruise in their seventies. Given they expect to work much longer, they see their pension not as funding their post-sixties lifestyle but as a social care plan for their final years.”
BMO Global Asset Management, conducted its annual Millennial Money Survey last month, and found that starting to save regularly is a priority for over a fifth (22%) of Millennial respondents, but lack of confidence and knowledge are key factors affecting their ability to save and invest. Almost a third of UK millennials would appreciate more help or education about how they can save their money.
So, what can younger savers do to future-proof their finances and manage to save a little for old age, all while paying off mounting student debt, earning lower salaries and struggling to save for a deposit on rocketing house prices? We are going to discuss four savings approaches below, with help from a few experts.
1. Saving with a traditional ISA
ISA take-up is declining among younger generations, likely due to overcomplicated financial terminology which adds extra layers of confusion.
So, what is an ISA? Basically, it stands for Individual Savings Account, and it’s totally tax-free. That means you don’t need to declare or pay tax on any money you put into your ISA, or any interest accrued. Your ISA allowance will last for a year, and you’ll be able to invest up to £20000 into a single account.
Ross Duncton, Managing Director, Head of Direct, at BMO Global Asset Management, says: “Small savings made young can have big benefits later in life, thanks to the benefit of compound interest. It’s hard to argue with the simplicity of an ISA - they make a brilliant default savings account for so many people.”
Tips for opening an ISA in 2019
Take aim: Decide on your financial goal, for example “shift my career up a gear” and set yourself a savings target to maximise the benefits of the tax-free wrapper (£20k per tax-year). For example, £15 per week would yield £780 in a year.
Research what’s right for you: take your time comparing different products and providers before committing to the one that best suits your needs. If in doubt, seek advice.
Shop around: ISAs come in all shapes and sizes (cash, stocks & shares, innovative, lifetime, help-to-buy, junior). You can only hold one ISA at a time, so use comparison sites such as moneysupermarket.com to find one with as high a interest rate as possible, and keep topping up as much as you can. Don’t be afraid to switch if there is a better option at the end of a financial year.
2. Lifetime ISAs
The Lifetime ISA – or LISA – is a little different to standard ISAs. You can only save up to £4000 a year, but you get a 25% bonus every month (up to £1000 a year) which means it can grow impressively. What’s more, it can be used towards your retirement or your first home. For example, if you’re 25 and use up a LISA’s annual £4000 allowance over eight years, you will have a savings pot of £40776 at age 33. Sounds pretty good doesn’t it?
Nici Audhlam-Gardiner, Managing Director of Lifetime ISAs at OneFamily told us: “Using a Lifetime ISA is a great way to boost your retirement savings over the long-term, as saving just £200 a month from age 20 could provide you with a retirement fund of over £254,000 for when you turn 60. This is in part due to the 25% government bonus, so for every £200 you pay in the government will add £50, up to £1,000 each year.”
If you’re struggling to even begin saving, she has some suggestions for sectioning off your income with the 50/30/20 rule.
“You should try to put half of your income aside for essentials, so housing, bills etc. Then allocate a third of your income for fun activities like eating out and shopping, and the last twenty percent of your income should be put towards your savings. Money for your savings goals can then be split between loan-term, retirement and short-term – for example your next holiday.
“If you take the average salary for a graduate of £22,000, you’ll be earning approximately £1,700 a month post tax, so that’s £850 for essentials, £510 for fun activities and £340 a month into your savings, split long-term goals £200 and short-term goals £140.”
3. Tap into apps to save without noticing
Henry Adefope, associate member of the Chartered Institute for Securities and Investment and CFA Fellow, says Millennials need flexible savings propositions that speak their language.
“Millennials (me being one of them) value instant gratification, and immediacy - we would rather do something today to experience it today than rely on the promise of tomorrow.
“Savings initiatives that give them the flexibility of saving without having to save, a softer, more indirect method, will compel a greater number of Millennials to future-proof their finances at an earlier stage of their lives.”
Adefope favours Robo-advisor ‘round-up’ apps – those which automatically skim off the change from daily purchases – as a great way to save without noticing.
“Similar to [pension] auto enrolment, this indirect way of future-proofing finances is compelling Millennials and helping them save in a way that suits their attitudes.
“Round-up apps help Millennial savers put away as much as £450 a year by rounding up purchases to the nearest pound and then banking the difference.”
Adefope recommends the likes of WealthSimple, Plum and Nutmeg to get you saving without feeling as if you’re parting with large chunks of limited disposable income each month.
“In combination with traditional vehicles like property ownership and a workplace pension, Millennials should have a better shot at getting closer to the nest eggs their parents were able to accumulate, no matter how impossible that appears,” he says.
4. Pensions for the self-employed
Add self-employment into the mix, and you’ve got even more layers to the pension predicament. With a significant rise in those identifying as self-employed, young people are the second fastest-growing group of self-employed workers, with part-time work accounting for most of the rise. While they enjoy higher working freedom, they miss out on both auto-enrolment for pensions, which was made mandatory in 2012, as well as the supplementary pension contributions from a full-time employer. Research has found almost two-thirds of self-employed workers have no savings at all for old age.
What’s more, the changes to the amount that can be paid annually into a pension and still be eligible for tax relief has dropped drastically – from £255000 to just £40000 since 2011. This means that self-employed people who put chunks of income aside for a pension in a ‘good’ financial year will be hit with a huge tax bill, just for trying to save the same amount as typical employed worker’s regular pension contributions.
But there are ways to outsmart the system, and not lose out on investing hard-earned money. It’s possible to carry forward pension allowances across three years. If you had made zero contributions since the financial year 2016-17, you could lump these two allowances together in 2018 to pay more in one go.
If you’re self-employed, it’s also a good idea to find an accountant who can help you with not only the dreaded tax return, but also provide useful insights on how best to stow away money for retirement, based on your unique income patterns.
There’s no doubt about it. Pensions are confusing and they are anything but exciting. But, if we want to continue enjoying avocado – not beans – on toast into our retirement years, we’ve got to get serious about them.