“Outdated” pension plans unsuitable for the young, says Price
The SJP director points out that when the average school-leaver or graduate struggles to keep a roof over their head it is naïve to think retirement planning will be high up their list of priorities.
By Mark Smith, Reporter, FE Trustnet
Saturday July 14, 2012
Social changes and the impact of the global financial crisis mean that traditional pension plans are no longer relevant to the latest generation of employees, according to Ian Price of St James’s Place.
"Usually the word pension puts people off," said Price. "The younger generation should view it as putting money away for the future."
"For most of them that future is pretty uncertain so the issue that youngsters have is that they need accessibility. Locking money away for a long, long time is not necessarily a good idea."
"People in their 20s are not interested in planning for their retirement, partly because their parents haven’t retired yet and partly because they have other financial worries."
Price, who is divisional director of pensions at St James’s Place, points to the recent phenomenon of "boomerang kids" whereby university and school leavers have had to return home to their parents after moving out because they couldn’t afford to pay their bills on the meagre salaries that employers are offering in the present climate.
There are, naturally, other reasons why younger people are struggling with saving.
"You ask a young person if they’d like to come out for a beer or stay in and put the money towards their retirement then its obvious which one is going to win," Price said.
"We’re also seeing a trend for everything to be happening later in life. People are well into their 30s before they buy their first house and most people are getting married later in life."
"We can also expect the pension age to be nearer 70 when the next generation of workers comes through."
The Government has already announced that the state retirement age will be raised to 67 by April 2028 in response to a funding shortfall.
The auto-enrolment scheme will also come into play this year whereby workers must choose to opt out of paying pension contributions via their employer.
"Encouraging people to save can only be a good thing," Price continued.
"Auto-enrolment ensures that people will have to actively consider their financial circumstances, their future and their spending and make a decision about whether to pay into a pension or not."
Many young people are expected to opt out of the scheme because, according to Price, they cannot afford not to have the money in their pockets.
"I see people putting the minimum amount of petrol in their cars at the petrol pumps, youth unemployment is as high as anyone can remember and companies are really squeezing people in terms of the amount they pay."
"There simply isn’t any margin in people’s salaries to put money away."
The danger is that this could lead to a whole generation of people who are inadequately prepared for their retirement.
Danny Cox, head of advice at Hargreaves Lansdown, believes that while traditional pensions are not perfect, they are still the best option for most people.
"If you have the option to join a final salary pension scheme then you must do. They still represent excellent value for money but tend to only be open for public sector workers," he said.
"Schemes where the employer matches all or some of your contributions are also a great move because these contributions are made before tax."
For young workers without access to these kinds of pensions, Cox says there are tax-efficient ways that can help them start a savings plan without sacrificing access to their capital should they need it.
"Many cash ISAs offer instant access and the interest on these products is tax-free," he explained. "The downside is that cash interest rates won’t beat inflation."
"If you can afford to take a five-year view then a stocks and shares ISA is a great option and savings can be made on a regular basis for as little as £50 a month."
"The benefit of saving regularly is that pound-cost averaging allows investors to buy more units when markets are lower and less when they are expensive, giving a performance boost."