Royal London

Future gazing, present-day preparation

Simoney Kyriakou

Content plus editor at FTAdviser

Millennials have enough to worry about instead of thinking about retirement, but unless they start planning today, they could risk a poor pensionhood. Simoney Kyriakou reports.

Rent, student debt, travel, low-paid early career jobs: all these things present Millennials with some measure of financial strain.

Neil Adams, pensions and investment specialist for advisory firm Drewberry, comments: “Among other things, Millennials have also been labelled as the ‘Boomerang’ or ‘Peter Pan’ generation.

“This is thanks to their tendency to delay many of the things their parents got down to a lot earlier, such as leaving education, leaving home, getting married, starting a family or buying their first property.

“Unfortunately, saving for a pension has fallen into this bracket too”. He explains the reasons for this: “Those born at the start of the 80s are, on average, only half as wealthy as those born in the early 1970s (by the same age).

“This is because of eye-watering student debt, rapacious house prices, shrivelling company pension offerings, wage stagnation, cratering interest rates and the rise of the ‘gig economy’.”

Name-calling

Not that they like to be called Millennials or Peter Pans or Snowflakes or any other moniker, just because they started their formative years after the year 2000.

As Iona Bain, Young Money blogger and author of ‘Spare Change’ comments: “Millennial is such a phoney term. It was coined in advertising to put all young people into one convenient box with homogenous desires, needs and goals.

Stepping onto the housing ladder, starting a family and paying off student debt are three of the biggest priorities which will distract from saving for retirement – Danny Cox

“Young people today can lead vastly different lives, come from vastly different socio-economic backgrounds and have vastly different needs from one another.”

Yet despite these different needs, young people all have one thing in common: statistically speaking, the majority of today’s 20-somethings will live longer lives than those of previous generations.

According to a 2016 report by Public Health England, life expectancy at older ages in England has risen to its highest ever level.

It found men can now expect to live for a further 19 years at age 65, 12 years at 75, six years at 85 and three years at 95. Women can expect to live for a further 21 years at age 65, 13 years at 75, seven years at 85, and three years at 95.

And money will be needed to fund their old age, whether to pay for home helps, healthcare, medication or long-term care.

But with the state unable to continue to help this ever-ageing population, Millennials need to take matters into their own hands, putting aside money as soon as they can into products that will help take care of them in their old age.

Conversation

It is a difficult conversation to have with young people. Danny Cox, chartered financial planner for Bristol-based Hargreaves Lansdown, says: “Retirement could be 40 years in the distance for a Millennial, while other, shorter term priorities are big calls on income.

“Stepping onto the housing ladder, starting a family and paying off student debt are three of the biggest priorities which will distract from saving for retirement.”

Sir Steve Webb, head of policy for Royal London, agrees: “Younger workers will tend to be on a lower wage and may have less disposable income.

“They may also be more focused on saving for a house deposit rather than the longer term goal of providing for retirement.

“There is evidence that we struggle to imagine ourselves in later life, and the younger we are, the more likely we are not to want to think about our older selves.”

But it is essential to have that conversation. Mr Cox explains: “With the state pension providing little more than a foundation income and the age at which it is payable moving backwards, starting saving early is so important to ease the burden later in life.”

Auto-enrolment

Workplace pensions have gone some way to helping ease this burden: auto-enrolment has brought nearly 7.5 million people already into some form of workplace pension arrangement.

Advisers with corporate clients – large, small or micro – or whose individual clients may have children just starting work, may find it appropriate to mention auto-enrolment and the virtues of encouraging young staff or clients’ offspring to start putting money away into a contributory pension scheme.

Mr Webb adds: “Before automatic enrolment, younger workers were less likely to be member of a workplace pension than older workers. This is not surprising.

“Even in workplaces where employers actively promote pensions, the very mention of the word ‘pension’ is likely to be a turn-off to younger people, and the jargon around pensions can be particularly off-putting.

Whether there’s room in the average Millennial’s pocket for both pensions and Lisas, only time will tell – Neil Adams

“The great news about automatic enrolment is that it has overcome these behavioural biases towards short-termism by defaulting people into pensions and leaving them free to opt out.”

In fact, Mr Webb highlights that young people have been keen to be in some pension arrangement: “The lowest opt-out rates have been among younger workers and more than 2m under-40s have now started on their pensions journey.”

Lifetime Isa

But because ‘Millennials’ have different needs and lifestyles, different products will be needed over and above a workplace pension. For example, many twenty-somethings are self-employed or entrepreneurs, and therefore fall outside of auto-enrolment.

This is why, according to Ms Bain, the Lifetime Isa (Lisa) is a “powerful brand” for young people.

Mr Adams adds: “The arrival of the Lisa is a welcome addition but to succeed it will need to be marketed in a way that will engage today’s well-educated, tech-savvy Millennial.

“While those who contribute the maximum £4,000 a year will qualify for annual bonuses of £1,000 up to age 50, the risk is Millennials confuse a Lisa with a pension.

“It’s certainly not an ‘either/or’ proposition as the tax relief available on pensions – not to mention the £40,000 annual allowance – makes them a far more powerful way in which to build retirement wealth.

“For many Millennials, the first priority is probably still to move out of their parents’ house, so Lisas may gain some early traction. Whether there’s room in the average Millennial’s pocket for both pensions and Lisas, only time will tell.”

Despite the controversy around whether this would be a savings vehicle of choice instead of a workplace pension, Ms Bain believes it is an example of a “product and service designed to accommodate the different choices young people have to make”.

Indeed, recent figures from Hymans Robertson suggest 68 per cent of young people would take out a Lisa in addition to a pension – so it is not necessarily a case of either, or, when it comes to having a workplace pension or an Isa.

For Ms Bain, the Lisa, with its dual focus of helping to save for a first home or for a pension at 60, “accepts that young people still have an aspiration to own property.”

Technology

For Adrian Boulding, director of policy at Now:Pensions, the way to help get Millennials thinking about saving for the long-term is primarily engagement and education, through technology.

He explains: “We need to work with the grain of human behaviour, not try and cut across it. So naturally Millennials with be more interested in saving for something relatively close, like a deposit for their first house purchase, than saving for a retirement.

“The inertia of auto-enrolment should be used to get them on board, and the reassurance of independent governance through master trust trustees or insurance IGC’s quoted so they feel comfortable leaving the decisions to someone else.

“We can then overlay fintech, with convenient apps and interesting tools, which will allow them to become engaged [with their pensions] in a manner they feel comfortable with and at whatever point in time they feel ready to engage.”


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