/ Money

Are 20-somethings falling into a retirement trap?

These days, pensions and young people don’t really mix. According to the Office of Nation Statistics, only 34% of men and 38% of women in their 20s are saving towards retirement. But that’s all about to change…

Next year, millions of people of all ages are going to be automatically enrolled into a workplace pension scheme. Soon, terms like ‘defined contribution’ and ‘annuity’ will be entering the vocabulary of my generation for the first time.

New research into young people’s attitudes towards money by PR company MRM, found that those terms above are befuddling to those in their 20s. It found that just 11% of 20-somethings knew what a final salary scheme or annuity was, while only 7% knew what auto-enrolment was.

The problem with pensions

When it comes to pensions and young people having them, the problem is clear. The UK has a culture of financial immediacy – we want our spending to have an instant impact on our lives, and placing money into something that can’t be touched for 40 years seems too big a commitment to make.

And even if the desire to save is there, people’s ability to do it is not. We’re in an environment of static salaries and rising prices, so even if we want to put money aside for the future, the sacrifice may just be too big to cope with.

In fact, the report suggests that young people feel that they need to be earning at least £25,769 to even think about saving for a pension. People in their 20s feel that a wedding and buying a car is more accessible to them than saving for their retirement.

Reassurance with insurance

Another concerning find was that people in their 20s prioritise taking out life insurance over buying a home, saving for health care or even taking financial advice. To me, this suggests a lack of understanding about the protection market and what insurances you really need in your 20s.

Without a home or family, someone in their 20s doesn’t need life insurance, but will certainly need to cover rental payments and bills if they can’t work. But as my colleague Martyn says, few people recognise the importance of protecting their income.

Getting educated

The findings of the report paint a pretty bleak picture for young people and their personal finances. So it’s time to start tackling the root of the problem by introducing financial education in schools now, so that the teens of today are better able to prioritise their finances.

But if like me you’ve already hit your 20s, take time out to do some research and understand the financial products out there. If you can’t afford to take professional financial advice, you can make use of free resources like Which? Money or the government-run Money Advice Service.


The big question is whether the economy is going to be able to support any sort of reasonable pension in the future at all (for most of us at least). Most final salary schemes are either closed to new members or ended and average salary schemes could be financially untenable in the future in exactly the same way (well before anybody gets a chance to see any benefit). It’s also clearly the case the 20 some-thing’s now have to deal with things like student loans that people of yesteryear didn’t (and a probably older retirement age).

As it stands many big companies and institutions have been shown to be deficient with regards to pension deficits – with the Pension Protection Fund (PPF) stating that of May this year it reached a collective new high point of £312bn so again the question is whether these schemes will be able to recover ground in the current difficult economic climate. Also Ros Altmann of Saga has pointed out that the situation might become a death spiral given long term interest rates and low gilt yields.

So the question is fundamentally whether as a 20 year old you see any value in putting money into a pension pot that might only be supporting current pensioners with significantly reduced benefit (if any) for you in the future.

At the moment, the best time to save for retirement is when you are in the 40% or (50%) tax band. It is unlikely that many 20-30 year olds will be earning that much, so I would suggest they invest first in a house and other net-of-tax savings schemes like ISAs.

But the biggest single problem for anyone saving for retirement is that HMRC keep changing the ground rules. When I had spare cash in my 30’s there was a cap on contributions, so I could not save as much as I wanted then. That cap was eventually removed when the lifetime allowance was introduced, and anybody could save 100% of eligible earnings if they wanted to. Now the cap is being applied again, as the revenue doesn’t like deferring its tax take. And there is the annual round of scare stories about HMRC abolishing higher-rate tax relief for pension contributions.

So “planning” for retirement is nothing but – its a lottery, thanks to the ever-changing rules and tinkering by successive governments! Don’t blame the 20 year olds for not understanding, and it will be no use teaching them about pensions in school – because everything the learn will have changed by the time they are in a position to contribute to a pension.

Unless your employer is going to contribute to your pension – which is effectively free money – I’d wait until you are in your 40’s to save seriously for a pension. Study the rules carefully and start to save like crazy the closer your get to retirement, using the most tax effective schemes that will then be available. This also has the effect of minimising the fees creamed off by the insurance company throughout the term of your pension savings.

Or just keep your money in a sock under the mattress.

Phil says:
5 August 2012

What caused companies to abandon final salary schemes was not the recession but the accounting rule that only permits pension funds to hold 110% of projected liabilities. It was brought in after the Maxwell scandal to prevent companies stashing away capital in tax free pension funds. It’s meant that pension funds have been unable to build up reserves during boom years to see them through recessions. Which? should first off campaign for this rule to be abolished.

We all face increasing uncertainty, nobody can tell what’s going to happen to interest rates long term but I would certainly not delay in putting money aside for a pension. It’s OK waiting until you’re 40 but can you guarantee you’ll still have a job then? Still be in work when you’re 50?

MartynA says:
6 August 2012

Saving for a pension must become a ‘habit’ instilled on people as soon as they enter the world of work. Waiting until your 40 is simply too late! Certainly at 40 revisit your plans, but unless paying into a pension is the ‘norm’ by that age you will simply have other priorites you don’t want to give up – kids education, nice car, holiday – whatever.

My dad marched me down to see the local Prudential representative the week I started work – I was only paying £10 a month at the time (back in 1978), but I have contributed directly or indirectly to a pension ever since. I now don’t think twice about it – it’s what I do! Were I to have started putting away at 40, a worthwhile pension would simply have been to expensive.

Many of the ’20-somethings’ will be in debt as a result of their time at university. I believe it is wrong that we should encourage anyone to get into debt, which is what the current student loan system does.

School leavers go on to university irrespective of their motivation and many drop out, partly as a result of the need to work when they should be studying. Unscrupulous employers often decide when ‘full-time’ students work – or lose their jobs. Courses are dumbed down to pretend that standards are being maintained and avoid criticism of universities, departments and teaching staff.

My view is that properly funded university places should go to those who can demonstrate motivation and reasonable ability so that students should not have to work except during the vacation or maybe one day at weekends. I am not against students doing some work and it can vastly improve their interpersonal skills and confidence, which is a great help for future employment. I would prefer if school leavers worked for a year before going into university. That would help them decide whether they really want to spend three or more years studying, and give them the opportunity to build up some savings.

It would save a great deal of taxpayers’ money to get rid of the idea that half the population should go to university, meaning that more young people could afford to save for their retirement and take out a mortgage rather than having to pay rent.

MartynA says:
6 August 2012

I have to agree with you. Too many people running up debt (which needs to be paid off) to do pointless degrees that don’t lead to jobs doesn’t help, neither does the % of take home income needed to put a roof over ones head. However, the moment you start working, you still need to be putting a few £ each month into a pension.

I am certainly not advocating that we should go back to the days when the only people who could afford to go to university were those with rich parents or managed to get a bursary. But running our universities costs the taxpayer a huge amount of money and standards are being debased by all those who are puttling in little effort, often because they spend more time working than studying.