Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
How young savers can bridge the intergenerational divide
The Resolution Foundation, a respected think-tank, has published a report on the issue of intergenerational fairness, saying that younger generations – sometimes sweepingly referred to as ‘Millennials’ – will end up financially worse off than those who went before them unless something radical is done.
The report argues younger people will struggle to own their own home or build up a retirement pot as valuable as their parents’, many of whom benefited from lower house prices and generous employer-sponsored ‘defined benefit’ (DB) pension arrangements.
The Resolution Foundation’s headline recommendation would see those aged 25 and over given £10,000 by the Government. This could be used for a limited number of things deemed to be socially ‘good’, such as saving for retirement, paying off debts or contributing towards a deposit on a first home.
Other ideas include drastically reducing the amount people can inherit without paying any tax, levying National Insurance on incomes over state pension age (with the money raised used to boost NHS funding) and radically reforming pension tax relief so everyone gets the same rate.
While it is true the so-called ‘Baby Boomers’ enjoyed certain advantages that generations following are unlikely to experience, it’s important to recognise this is not a one way street – particularly when it comes to saving for retirement.
While some Baby Boomers were lucky enough to get DB pensions as part of their employment contract, historically there was no requirement on employers to offer any sort of retirement provision at all – meaning some will have saved little or nothing for old age.
Today firms are required to offer a defined contribution (DC) workplace pension and match the first 2% employees pay in. From April 2019 employers will be required to pay in 3%, with employees stumping up 4% (and another 1% coming through tax relief).
There have also been huge strides in value for money, particularly when it comes to personal pensions.
Back in the 1980s or 1990s savers might have had to pay 3% or more to invest through a pension. Nowadays there is a huge choice of low-cost platforms that charge as little as 0.25%.
Furthermore, the rise of cheap tracker funds means you are able to invest in stocks and shares for a total cost of less than 0.5%.
The difference this could make to your retirement is enormous. Someone paying in £100 a month for 40 years who enjoyed annual investment growth of 5% and paid charges of 3% would end up with a pot worth £74,000.
If the same person paid charges of 0.5%, their fund would be a whopping £60,000 bigger (£134,000).
Then there’s technology. As well as dramatically lowering the costs associated with investing, the rise of online and now mobile tech allows you to access a diverse range of assets around the globe instantly. Older generations could barely have dreamed of such things.
Tom Selby, senior analyst, AJ Bell