There’s no doubt that the concept of retirement is changing; for many of us it won’t be the end our working lives, but just a change in working hours or even career. Several factors have driven this change but arguably the two main culprits are longevity and inadequate retirement provision.
As we live longer, we need bigger pension pots to see us through. Alternatively, we must retire later or as many people will do, plan for a transitional retirement. By transitional retirement I mean people continuing some form of work albeit part time to fill the financial gap.
You can see this change in action at many well know retailers where the average age of customer services staff is visibly increasing. Are these retirees who need additional income to supplement their state and private pension provision?
The benefit of hindsight
According to research carried out by Prudential1, over a third of retirees wish they’d saved more for retirement and 25 per cent wish they’d started saving from a much earlier age. But what stopped them then is probably no different to what is stopping the younger generation now. Other financial priorities!
Pensions are important and auto enrolment is doing a great job at getting people into workplace pension schemes. But with the best will in the world, if you’re in your 20’s or 30’s and struggling with debt while at the same time trying to save for your first home, retirement planning is just not top of your list.
Our own research shows that for over 25 per cent of millennials, buying their first home is the top priority. Saving for retirement on the other hand, is a concern for less than 10% per cent.
Early access to pensions?
The issue for millennials is not indifference or even disinterest. Pensions for a good number of young people are important but they’re just not a priority yet.
The government is aware of these competing needs and in response, we’ve heard calls from people such as James Brokenshire MP to allow early access to pensions to help first time buyers. It’s a controversial idea but not new. In countries such as South Africa this in effect already happens; early access is possible, and mortgages can be secured with pension funds.
But is this a case of robbing Peter to pay Paul? And if it was allowed would it just store up problems for the future?
This might well be the outcome, but that’s where the Lifetime ISA (LISA) comes into play.
Pension, Lifetime Isa or both?
The Lisa is not quite a cradle to grave product, but it’s the nearest thing we have to it. It allows anyone under the age of 40 to save for retirement (funds can be withdrawn from age 60) and just like pensions, the government gives savers a financial incentive.
With pensions employees get tax relief on contributions; with a Lisa they get a 25 per cent bonus of up to £1k a year.
In an article earlier this year, Michael Johnson an independent research fellow at the Centre for Policy Studies argued that many millennials would be better off with a Lisa than a pension. His argument is that most millennials are basic rate taxpayers and so only get 20 per cent tax relief on pension contributions, whereas under a Lisa they get a 25 per cent bonus.
You do still need to consider the value of any employer contribution and restrictions such as a maximum contribution of £4k a year, but this argument is still very compelling for those pushing for a Lisa to become an approved auto enrolment vehicle.
Saving the best till last
But from a millennial’s point of view it’s exactly what they need; early access. Although the end game could be retirement, crucially a Lisa offers savers early access for first home purchase (so long as the value of the house is no more than £450k). Money can be withdrawn for any other reason, but if it’s before 60, there’s a 25 per cent penalty.
The 25 per cent government bonus makes it so much easier for younger employees to save for their first home; a workplace Lisa is a must.