Archive for September, 2011

How will today’s graduates afford retirement?

September 9, 2011

Free tertiary education. A job for life. Affordable housing. Final salary pension. All a thing of the past, we’re told. The children of the baby boomer generation are looking increasingly likely to be worse off than their parents.

The Young Fabians recently considered the implications of the last of these, and how individuals entering the world of work can be encouraged to start putting money aside in a pension scheme. There was a broad consensus that better financial education was needed and the demise of the Child Trust Fund – as a way to get citizens in the habit of saving from an early – was not. The pension industry’s marketing of itself to young people was found wanting, particularly as their selling points – the tax-free nature, the employer contributions – were not familiar to some of the young professionals in the session itself.

Rachel Reeves MP noted that formulation of pensions policy involved, quite rightly, the likes of the ABI, the financial services sector and employers, but seemed to have ignored the views of the very people who it was aimed at.

While the pensions industry could be given a kick up the arse, I get the feeling a significant barrier to take-up is the effect of the economic downturn. Since 2008 there have been three trends. Firstly people, particularly the young, have a lot less job security and are less likely to want to put money away for a long period of time when they might need some in the bank in case things take a turn for the worse. Secondly, with the cost of borrowing pushed down, there is no incentive to save as it is difficult to find an interest rate which will beat inflation. Thirdly, the shortcomings of the financial markets as a generator of wealth have been exposed, so that the “value of investments may fall as well as rise” warning on financial products is even more ominous for an unseasoned investor.

Talking about pensions is not enough to address the generational divide. Even if we all signed up for a pension, retirement doesn’t sound like fun. With credit still crunched and house prices still out of the reach of thirtysomethings, there are going to be a lot of people who will not own a home outright by the time they retire.

Only one in twenty over-65s currently live in the private rented sector with three quarters in owner occupation and a fifth in social housing, according to the CLG. In comparison, 36% of 25-34-year-olds rent in the private sector. Now of course many of them will buy eventually, but the rate of those still renting when they hit 65 (or whenever we’ll retire) is going to be a lot higher than 5% the way things are going. Apparently if I continue paying £1200 into my pension pot per year and assuming it earns an average of 7% growth a year, I will get around £5000 per year in retirement. This sum would barely cover rent this year, let alone after 40 years of inflation.

Housing will have to be made a lot more affordable if the pensioners of the mid 21st century are going to keep a roof over their heads.