When all is said and done, there is often more said than done
Following on from my previous blog “Teaching children the value of money”, I have reached a new chapter;
As an adviser, I live the statement above, clients do not always take our advice, or may only take parts of it. As I am also a parent to a 16-year old, I get to live this reality at home too
I have been teaching the merits of saving for children for many years, sometimes in the hope that these practices would also guide the grown-ups to do the same. Over the last 26 years or so of my career, I have guided clients at both ends of life (and everywhere in between)
If I have learnt anything, it is that we need to think more as families and groups when it comes to money, rather than as individuals left to our own devices. The advice I give often comes from my career knowledge and a great deal of lived and learned experiences
Financial education is unfortunately often taught by experience, rather than by the experienced
Savings are more important now, than ever
Stagnating pay, Gig economy and zero-hour contracts
Rising housing costs
Unfunded Government pensions
Low or near zero interest rates
More reliance on property ownership to fund retirement
The Savings Gap
Looking as far ahead as retirement, Economists tend to base a comfortable retirement on the ability to achieve 70% of preretirement income
The International Longevity Centre (ILC), estimates that in the UK, workers average a 4% shortfall
Doesn’t initially sound much, but that is after the expectation that people are saving a minimum of 10% to 20% of their income
If you are thinking, how am I going to save that amount!, there’s this –
You would need to save 15% to 25% to match the retirement incomes of previous generations
I realise that many cannot afford to save much, but time and getting started early, helps with that burden. There is no easy answer, but there are options;
Save more today by increasing pension fund contributions
Work for longer and delay retiring until later
Spend less in retirement and adjust to a tighter regime
Education, Education, Education
Before we blame the lack of savings on younger generations spending too much on shoes and video games, let’s look at the research
If we adjust for inflation and exclude housing costs, those aged 25 to 34 in the UK spend less relative to 55 to 64-year olds than at any time since the 1960s
The reality is that millennials face additional financial pressures from high property prices and pay packets that have only just risen in line with inflation and less secure jobs
My house is my pension
If I had a pound for every time I have been told this!
So, how does your house become your pension?
Sell up and buy a cheaper property
Invest the profit from downsizing to provide an income
Borrow money using Equity Release (Lifetime Mortgage)
This will only help those that own a property, but home ownership rates are falling
Younger generations are finding it more difficult to buy property following the rapid rise in prices between 1996 and 2006
Almost 60% of baby boomers owned their own homes by the time they were 30, whereas just 30% of Millennials meet that statistic
The transfer of wealth through inheritance is unlikely to help
On average, millennials will have to wait until they’re 61 to inherit the family silver
A consequence of high property prices is that millennials are spending more of their incomes on accommodation than previous generations. By the age of 30, almost a quarter of their after-tax income pays the rent or mortgage, compared with 15% for baby boomers
This trend puts additional pressures on their ability to put away money for later life
Although home ownership rates have plummeted for younger generations, expectations haven’t caught up with this reality. According to the Pensions & Lifetime Savings Association, one third of 35 to 44-year-olds feel they will have no choice but to use their property to finance retirement
Yet almost a quarter of them don’t yet own a property
We need to tackle the lack of basic financial knowledge at a time when the government is asking people to take more control of their financial futures
In one survey, fewer than one in three demonstrated an understanding of compound interest, the impact of inflation and why it’s important to spread risk
During 2015, market research firm Ipsos Mori asked people in the UK to estimate how much they would need to accumulate in a private pension fund to generate an annual income of around £25,000 after they retire
The average view was £124,000, with some going as low as £90,000
That is an expectation that £90,000 will provide £25,000 every year for approximately 25-years!
Keep it in the family
Across the UK, every five-year cohort since those born in the mid-1950s has accumulated less wealth than the preceding group had done at the same age
Student debts put additional financial pressures on the ability to save for retirement
Since the government removed the cap in 2010, most English universities now charge annual tuition fees of more than £9,000. Add in maintenance loans and interest payments, and a student who started a three-year course in 2017 is likely to graduate with £51,700 debt.
Meanwhile, we’re all living longer, which means our pension pots will need to support everyday spending for many years, together with care costs in later life for ourselves and our families.
You would think that based on the above, we would share family resources and parents & grandparents would set up savings plans, to teach children the value of savings
I still see many families paying large sums of Inheritance Tax, rather than making lifetime gifts or using equity in their homes to spread wealth more evenly
Unfortunately, something as simple as a Will or Trust can help reduce the 40% Inheritance Tax charge, but 80% of the UK don’t use them.
Often children only find out what savings their parents had when they calculate how much inheritance tax is due on it
Relying on the Government
As income from taxation falls, the costs associated with paying pensions are rising as are the costs for providing health care and social care
The World Economic Forum has said that governments of the world’s largest economies are sitting on $53 trillion of unfunded pension commitments
So, economies have three difficult choices
borrow more money
reduce welfare spending
Increasing the state pension age is another option but it’s unlikely to solve the economic challenges associated with ageing
Some Great Reward
Younger generations around the world are already accepting that they will probably retire later in life than their parents
In the most recent British Social Attitudes Survey, which has been carried out annually since 1983, more than one in three people aged 18 to 24 and one in five aged 25 to 34 expect to retire in their 70s. Yet just 10% of people in the UK aged between 70 and 74 work today
As we emerge into a world dominated more with automation and flexible working, Employers can help people work into later life by introducing less rigid working practices
Studies suggest that increasing the participation rates of older workers expands the economy. According to the National Institute for Economic and Social Research, extending everyone’s working life by one year could increase the UK’s GDP by 1% a year, which is equivalent to £18 billion in 2015 when the study was carried out
Do you expect your children to work until they are 70?
My journey to date
Since she was 9, I set my daughter up with a pre-pay debit card, attached to an App so that I can oversee functions available to her.
She learned important lessons;
When you spend it, it has gone
When you save, it grows
How much do you really want that new thing?
When we were in a shop, she paid for her items. That way she learned the simple and effective lesson, that each transaction reduces what you had before
I have also invested a regular amount into a Junior ISA.
As she got older, I showed her the statements, up and down. We also discussed the companies we had invested in and why
Saving takes commitment and is a structured part of your outgoings
There is a short-term risk, which can be managed and needs to be reviewed
There are rewards over the longer-term
Inflation affects everything
Consistency and time are vital to building for the future