When I was growing up, my mother set aside small sums of money every month to provide nest eggs for my two sisters and me. I was the eldest, and as soon as I reached the age of 17 I asked for the money. She handed it over with some reluctance and I spent it all on a motorbike: a Yamaha 200.
Then I took to the roads, with an L-plate and without a clue about how to ride a bike that could reach 60 in almost no time at all. For a while I got away with it. Then I lost control taking a corner on a country lane much too fast in the rain. The bike and I went our separate ways. It careered along the road and hit a tree. I rolled down a grass verge into a field. My guardian angel was on duty that day. The bike was totalled and I was very fortunate I wasn’t a write-off myself.
This was one time among many I could have been a contender for a Darwin award in my teens and 20s. The only way I learned things was the hard way. Most young people aren’t as foolish and reckless as I was — but they lack experience. Should we assume they have the ability to make smart financial decisions without guidance?
Pensions and children
There are various ways parents can set aside money for their children’s future. I suspect from my conversations with workplace pension scheme members that most people don’t know that starting a pension is an option alongside opening a Junior ISA, for instance, or buying a Children’s Bond.
Pensions are very tax-efficient. Even a newborn is entitled to basic-rate income tax relief, so £2,880 paid into his or her pension is immediately increased by 20% to £3,600. It then grows almost free of tax. £2,880 is, coincidentally, just under a grandparent’s annual inheritance tax gift allowance.
Opening a pension for a child is long-term saving at its longest. Under current rules, the money can’t be accessed until the child is 58 and on the cusp of early old age. This is its biggest advantage or its biggest disadvantage, depending on your viewpoint.
Using an online calculator, assuming a very conservative net annual growth rate for equities (stocks and shares) of 5%, I note that an initial investment of £2,880, made up to £3,600, would grow to £65,034. Assume 6% and it would grow to £115,846. 7%, £206,260. A nest egg laid by an ostrich.
Moving the goalposts
It’s rare for successive governments not to tinker with pension rules or indeed radically overhaul them, so who knows how things will change before today’s infant approaches retirement? We can say with some certainty that UK governments of every hue are keen to pass accountability for supplying retirement income from the state to the private sector and to individuals. In other words, you are largely responsible for saving enough for your retirement.
Auto-enrolment (AE) was a giant step in this direction. Now that AE’s six- year rollout has settled, I can confidently predict that minimum contributions will rise. I wouldn’t be surprised, moreover, if opting out was abolished. Plus, the earliest age at which pension savings can be accessed is likely to keep going up.
Uncertainty about future legislation and work patterns means that there’s an element of gambling if you put money into a pension for a child. But that’s the future for you anyway. Describing it, as we sometimes do, as foreseeable, is surely tempting fate.
Millennials and Generation Z
I’m a boomer, but not one who thinks I had it tough and young people today are pampered and entitled. If anything, I’m inclined to think the opposite.
But that’s another blog. Here, I’ll just make the obvious statement that young people in the workplace often have all sorts of financial commitments while they’re decades away from being able to access pension savings. It’s not unusual for them to feel detached from the money they’ve saved, as though it isn’t really theirs.
This sense of detachment is intensified by the fact that the process of ageing is impossible to anticipate: one’s older self is a stranger waiting in the future, distant and unimaginable.
Some young people are natural planners, but getting employees in their 20s and 30s to take a real interest in their pension is generally not the easiest part of our work at Employee Benefits Collective (EBC). We’re always learning too. So, we:
- Urge employers to offer pension induction presentations to groups of new employees — not all of whom are young, of course. Face-to-face contact is invaluable, adding a personal dimension to technical concepts. Regular refresher sessions are a good idea too. People’s thoughts and questions about their pension change as time passes and its value grows.
- Ensure that employees understand that employers’ pension contributions are effectively a component of their salary. Avoiding making personal contributions by opting out may seem like a pay rise but in fact it’s quite the opposite.
- Promote the striking effect of compounding on investing over the long term, as discussed above. It’s an eye-opener for many people. Seeing projected values (and the large differences small contribution increases can make over time) is a huge incentive to saving sooner rather than later.
- Explain how providers’ tech has been advancing rapidly in recent years. Importantly, most have now launched apps that allow policyholders to access their pension on their phone as easily as they can their bank account. This is a virtual world that young people feel comfortable inhabiting.
- Believe in scheme governance to the point of fanaticism. Post- governance comms, issued to the workforce by HR with our help, are an effective way of regularly reminding employees, young and old, of the importance and value of their workplace pension.
- Aim to keep it simple, using direct, informal language when talking about pensions to employees, and indeed employers. Some technical terms are unavoidable, but a stream of jargon makes the average person shut down.
AE casts a long shadow. It’s been a game-changer, with its principles and effects reshaping pension-planning for every generation.
I can’t see contributing to a pension for a child becoming commonplace. I would, however, like young people — and the younger, the better — to understand that their pension is ultimately their responsibility and it will be with them through growth and decumulation until their number is up. It’s our job to help them to recognise this.