So it’s now 6 months since the ONS broke the bad news for youngsters and it looks like the pensions industry or at least its marketing department, is waking up to an opportunity.
Under 24 and under pensioned?
Under 24 and not in employment , education of training (a NEET)?
You’re not? Yes well I thought as much, the readers of this blog look back to those days with fondness and not with sorrow that contributing to a pension was low on their priorities.
If you are in education till you’re 24 you are going to be highly educated, if you are training , the same can be said.
We’re worried that people who could be working and are moping about are wasting a £300,000 opportunity to get pension wealthy.
The story’s from Maxine Kelly who is 20 years out of being in full time education and now breaks news for the Financial Times. That we should be saving longer, harder and for later in our lives is for the Pension Commission but I’m afraid it isn’t “breaking news”.
For the wealthy, there’s an opportunity for parents to fund the pension gap but when does that gap begin? Rich friends of mine quietly admit to having money paid into stakeholder pensions in the early years of the century. It’s a tax trick from an age when tax was supposed to do what auto-enrolment did much better.
A maximum contribution of £2,800 a year for a Neet with no other earnings would attract tax relief of £720. Families could also pay into a Lifetime Isa, which is used to fund a first house purchase or retirement. Up to £4,000 can be paid in each year, with contributions receiving a 25 per cent uplift from the government.
The problem for young people is how they happen to be out of a job. One of Maxine’s colleagues has a son with a degree and no job, he’s a REET. The problem is not doing anything and wanting to. This cannot be sorted by parental make-up, we need a way of adapting to new employment issues – higher national insurance for labour , low technology costs replacing the need for human labour. This is stuff for Government and for our economy and we will find a way – we have done this before.
Nothing will find the £300,000 deficit in a youngster’s pension by not working. But is this £300,000 relevant to many youngsters? (my bold)
Royal London estimated that a would-be higher earner on £51,000, and contributing to a pension from age 25, could end up with £300,000 more in their pot than someone who started at age 30. This assumes that they and their employer each pay in 5 per cent of salary, that salary growth over their career is 2.5 per cent and that the investment return is 5 per cent net of charges.
There are of course many reasons why a 25-30 year old could opt out of pensions. They include prioritising housing, paying back student debt, having a family – when you think of it – it is amazing that we start a pension and that is of course because most of us don’t make that decision, we are auto-enrolled.
So the £300,000 is not a REET story but a worry from an insurer that young people don’t get pension contributions to a point where they opt-out or that they opt out of employment altogether. Self-employment is a legitimate way to get on with your life but doesn’t require a pension contribution to the missing £300,000.
Do I worry about REET’s- yes I do. I worry that there is a lack of opportunity mixed with a lack of determination to get on with young people. There is no doubt that we are going through an employment problem for them but to mix that up with a problem of inadequate pensions is the fretting of an older generation for their kids.
What you can do if you’re a parent looking back on your children’s first years at work is ask “are they getting the most out of deductions from their pay for their elder years“. The answer to that is a great big question mark “?”.
The sad truth is that we’ve yet to get people an understanding of what they are buying with the 5% of band earnings that is the minimum they pay to be in a workplace pension.
With the state pension they need to be in the system for 35 years to get it in full but there is no such formula for workplace DC pensions and that needs to change. Telling high-earners that by not being in a workplace pension they could be short £300,000 at retirement is an example of how far we are from understanding pensions.
The Pension Dashboard will not create such an expectation of pension wealth and nor should the pension press. Projections of income in retirement could and should be based on real income. That is what we get from the state pension and what we should get from pension providers. The use of sensational “wealth-pots” is the kind of irresponsibility that gives pension marketing a bad name.