On Friday, 10th June 2016, Michelle McGagh delivered the following speech at the Second National Retirement Income Summit at the Chartered Insurance Institute. This one day summit was made possible through the support of the ILC-UK Partners Programme.
Hello, I’m Michelle and I spend an awful lot of time writing about pensions but I don’t save into one.
Instead I’m focusing on paying off my mortgage early which I believe will give me financial freedom. In fact, a financial adviser told me that if you are in your early 30s like I am and are trying to choose between paying a pension or paying your mortgage then throw everything you can at the mortgage, then work on the pension.
I figure if I finish paying my mortgage at age 40 then I’ll still have another 30 years of working life to save for my pension and I’ll be able to throw even more money at it.
This extension of our working lives is key when it comes to younger people and their failure to save.
A lot of my friends aren’t saving into a pension and there’s a variety of reasons: they’re boring, they don’t understand them and they don’t think they’re valuable.
But the main reason that they give me when I ask them why they don’t save is: I’ll never retire.
I know people may think this is the folly of youth but there’s an interesting shift in our working lives that means this is a point worth looking at.
If I take the example of my dad. He’s 56 and has worked as a welder since he was 16. He’s counting down the days until he can retire, and is working out whether he has enough money to retire early and bridge the gap to the date at which he gets his state pension.
For him, a job is the hard work you do before you get your reward of 25 years retirement.
I think that’s an out-dated concept.
My friends don’t think they’ll retire because they want to keep working. They have dreams of setting up businesses, they do jobs they enjoy. They do something they love, which often involves lower pay which in turn means they can’t save but it doesn’t matter to them because they want to keep working anyway.
When it comes to those who do save they are invariable doing so to buy a house – which obviously gets in the way of pension saving – but some are thinking of mid-career breaks where they can take a year out to go travelling or volunteer somewhere.
They’re planning to have mini retirements rather than one big retirement at the end of their life.
And I don’t blame them. Saving for a mini retirement – say a year travelling – is much easier to get your head round than saving for a 30 year retirement.
Telling someone that they need to save half a million quid into a pension pot is hugely off putting – people think they’ll never be able to hit the target so why bother starting.
Also keep in mind that my generation and particular people younger than me started our working lives just before or during the financial crisis – that makes people wary of investments and risk-averse. If you can afford to squirrel away a little bit of money then you certainly don’t want to hear that you’ve lost it.
I know there will be people sitting in the audience thinking ‘well, if all these young people didn’t spend so much money on gadgets and holidays to Ibiza then they’d have plenty of spare money to save’.
It’s an argument I’m sick of hearing because I don’t think it reflects the reality of young people’s lives. I don’t see how giving up a £30 a month iPhone contract will help you reach a £500,000 pension pot.
Yes, we live in a society where we are encouraged to spend and keep up with the Joneses – I’ve been sucked in by consumerism in the past, to a huge extent – and yes I think a lot of us with disposable income could find areas where we waste money, even if that’s just reining in the daily Starbucks.
However, there are far bigger shifts that need to happen in order to give younger people a shot at saving even remotely enough for retirement.
They need to be paid more. Wages have remained pretty much stagnant. Wage growth slowed to 2% at the end of 2015 according to the ONS and while inflation is running at just 0.5%, we all know that doesn’t including housing costs which are a huge proportion of people’s wages, and an increasing at an astonishing rate.
I think we also need to regulate the rental market to stop huge rises in accommodation costs, which would give people a chance to budget their money and hopefully enable them to save without fear their rent is going up and they’re going to have to cough up hundreds more pounds.
I’d also like to see lifetime ISAs be made accessible via the workplace and through auto-enrolment because I think it would be a much more attractive prospect for younger savers and there is a fear they’ll miss out on employer contributions if they sack off workplace saving in favour of lifetime ISAs
And finally, the industry and government needs to do more to adapt the retirement saving message to a generation whose lives are so different to the ones gone before.
All I ever hear is, start saving as early as you can; from age 22 ideally when you’re in your first job. Get real! We’ve got student loans to pay for, houses to save for and families to hopefully start.
Be realistic about what happens if we start saving at 35, tell us about how long we’ll have to work and how much we have to save. If you keep providing scenarios like ‘start at 22 and save 15% of your income’ we’ll turn off because it’s not a realistic expectation for us.
We have other financial priorities to deal with before we start saving for pensions – like paying off our mortgages – and we expect our working lives and retirements to look very different to our parents and grandparents, so the government and industry will have to find a new way to engage with us, but that doesn’t make us a lost cause.