Financial advantages: Millennials benefit from free pension cash, low interest rates, and a leg-up on the housing ladder that their parents never enjoyed
When it comes to building a retirement pot or buying a home, do the younger generations really have it so bad?
Tom Selby, 32, a senior analyst at investment firm AJ Bell, reckons on money matters like this they have never had it so good.
He explains the financial advantages ‘millennials’ – roughly speaking, people born between the early 1980s and early 2000s – enjoy today.
Saving for retirement: Employers give free pension cash
Some of the so-called ‘baby boomer’ generation born after the Second World War were lucky enough to receive gilded final salary pensions as part of their employment contract, writes Tom Selby.
Those who get them enjoy a generous and guaranteed income from retirement until their death, after which their spouses usually receive reduced payouts for the rest of their lives.
However, historically there was no requirement on employers to offer any sort of retirement provision at all – meaning some older people will have saved little or nothing for old age.
Today firms are required to offer you a defined contribution workplace pension and pay in 2 per cent of your salary, as long as you pay in the minimum 2.4 per cent too. From April 2019, employers will be required to pay in 3 cent, while the individual minimum rises to 4 per cent.
That means everyone in employment in the UK at least now has the chance to build up a decent nest egg for old age – although most will need to pay in more than the minimum to have a really comfortable retirement.
Tom Selby: ‘First-time buyers today can get a leg-up from the Government in saving for a house’
Cost of investing: Cheaper options mean bigger pension pots
There have also been huge strides in value for money, particularly when it comes to personal pensions.
Back in the 1980s and 1990s savers might have had to pay 3 per cent or more to invest through a pension.
And, lest we forget, this was an era when lighter-touch regulation meant consumers were often largely unprotected – who can forget the scandal that left hundreds of thousands of Equitable Life policyholders facing penury in retirement.
Nowadays, in contrast, there is a huge choice of low-cost platforms and ‘tracker’ funds available that mean, all-in, you can buy a pension and invest in the stock market for 0.5 per cent or less.
The difference this could make to your retirement outcome is enormous.
Someone paying in £100 a month for 40 years who enjoyed annual investment growth of 5 per cent and paid charges of 3 per cent in the ‘old world’ would end up with a pot worth £74,000.
If the same person paid charges of 0.5 per cent, their fund would be a whopping £60,000 bigger at £134,000.
Older generations: Some get generous pensions, but not all employers contributed cash as they are forced to do today
Financial choices: Freedom to save and invest how you want
As well as democratising investing and lowering costs, the rise of technology in financial services has drastically increased the choice available.
Indeed, savers today can invest in stocks and shares, bonds, and funds at the touch of a button – or even through their mobile app. Older generations could barely have dreamed of such things.
Younger savers also stand to benefit from the ‘freedom and choice’ reforms introduced by former Chancellor George Osborne in April 2015.
Whereas previous generations were all too often shovelled into inappropriate annuity products offering a derisory rate of return, today people have total freedom over what to do with their hard-earned retirement fund from age 55 – although that age will likely rise by a few years for future retirees.
Provided a future Government doesn’t attempt to reverse the freedoms – and that’s potentially a big caveat – Millennials should have more options than their predecessors when they decide to turn their pension into a retirement income.
Buying a first home: Borrowing rates are low
The Resolution Foundation report (see the box below) also points to the intergenerational divide that exists when attempting to buy a home. And it’s impossible to deny the fact rising house prices in recent decades have shut out many young people from the UK property market.
Should millennials get a £10k handout?
Earlier this month the Resolution Foundation, a respected think-tank led by former Conservative cabinet minister Lord Willetts, published a wide-ranging report on the issue of ‘intergenerational fairness’.
This is the idea that younger generations – sometimes sweepingly referred to as ‘millennials’ – will end up financially worse-off than those who went before, thus breaking a key in-built ‘contract’ that knits society together.
In particular, the report argues young people will struggle to own their own home or build up a retirement pot as valuable as their parents and grandparents, many of whom benefited from lower house prices and generous employer-sponsored final salary pension arrangements.
The central headline-grabbing recommendation was for those aged 25 and over to be handed a cool £10,000 which could be used in limited circumstances deemed to be socially ‘good’ by policymakers, such as paying off debts, saving in a pension or buying a first home.
In addition, the report advocates 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.
But those who suggest older people had things easy when getting on the housing ladder often forget the eye-watering interest rates mortgage holders paid at the time.
Throughout the 1980s, for example, Bank of England base rate hovered somewhere around the 10 per cent mark, peaking at almost 15 per cent in 1989 – so even if prices were low, anyone who had to borrow to buy faced huge costs in doing so.
Today, in contrast, if you can get a deposit together – arguably the most difficult bit with average deposits costing about £30,000 – mortgage deals are available for 2 per cent or less, depending on the term of the loan.
Government support: Help for new buyers
First-time buyers today can get a leg-up from the Government in saving for a house.
You can save up to £200 a month in a Help-to-Buy Isa and, if you use the funds towards a deposit on a first property worth £250,000 or less – £450,000 or less in London – the Government will top it up by 25 per cent, with the maximum bonus set at £3,000.
There’s also the Lifetime Isa, which allows anyone aged 18-39 to pay in up to £4,000 a year and receive an immediate 25 per cent bonus, up to a maximum of £1,000.
You can keep paying in and receiving the bonus until age 50, and withdrawals are tax-free if you’re using the funds for a deposit on your first home (provided it’s worth £450,000 or less), you’re age 60 or over, or you become terminally ill.
Note that the with Lifetime Isa withdrawals for any other purposes are hit with a 25 per cent Government exit charge, so you might get back less than you put in.
This is not to say millennials have it easy – far from it. But with the debate over intergenerational fairness now bubbling to the surface, we can’t ignore the fact that, in many ways, young savers have never had it so good.
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