Why millennials should add savings to their must-have items
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Changes to the pension age will mean that many young women will be worse off – which is why they should start saving now, says Peter Sharkey.
The political shenanigans that have enveloped the land for nigh on three years have had a deep, profound effect on most adults, although the repercussions have not all been completely negative.
For example, the underhand machinations of the so-called 'metropolitan elite' (who are these people?) have been effectively countered by ordinary folks in a manner reminiscent of the seventeenth century.
You will recall from your GCSE history lessons that it was Charles I who, believing his authority was drawn directly from God, wrote, "It is for me to decide how our nation is to be governed," an attitude which didn't go down particularly well and resulted in his execution. Perhaps the 'metropolitan elite' who think along similar lines should take note - most 17th Century Englishmen and women believed Charles deserved what he got.
Though it's been difficult to draw any additional positives from the shambles of the last three years, I believe there are two more that stand out.
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First, as a nation, we're much more politically engaged than I can ever remember. In a modern-day democracy (and we continue, just, to fall into that category), this is a healthy state of affairs.
Second, it's become startlingly apparent that if you want something doing, you should definitely not rely upon the government doing it for you. Such an approach is absolutely essential when taking account of future state pension provision.
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Let me explain.
Last week, The Telegraph published a report which showed just how much worse off many young women, referred to as 'Ms Millennial', will be as a result of her official pension age being delayed.
Basing their calculations on a female currently aged 35, the report said that "Under the old regime, our 35-year-old would have retired in 2044, but this has been pushed back to 2052, when she will be 68." It went on to note that while Ms Millennial has time on her side, she "must make the most of it [if she is to] retire at 60, as she would have expected in her twenties."
For the time being, the state pension rises in line with the highest of inflation, earnings increases or 2.5 percent, the famous 'triple lock'. Based upon this and assuming a 2.5% annual increase in pensions, the report calculated the difference between what Ms Millennial could have expected to receive from the age of 60 and what she will receive when turning 68.
The difference is a staggering £122,812, the equivalent of £15,350 a year.
Given Ms Millennial's longer-term horizon, ie she has 25 years to make good the above shortfall, the report suggested that she was in a position to "take more investment risk…to achieve her financial goal." This would entail investing £195 a month for the next quarter century, during which she could anticipate a "sensible gain of 5.7 percent a year," a return that would produce a pension pot a shade over £130,000 by the time she reached 60.
However, it's an inescapable fact of life that, in all probability, the state pension age will continue to increase over the next 20-30 years. Why? Ostensibly because pensions are paid from current income, ie, they're not invested - and never have been. In other words, as the population ages, so more people draw from the state's pension pot, while fewer pay in their NIC to fund them.
Young women such as Ms Millennial are hardest hit by this arrangement. Whereas their mothers and grandmothers could retire at 60 and receive a state pension, Ms Millennial and her peers cannot; instead, they face the very real prospect of the state pension age being pushed beyond 70, which is why they must start setting aside relatively modest sums of money (the above example equates to £31.25 a week) if they wish to avoid working well into their seventies.
This is not a problem confined to Britain; the millennial populations of most other developed nations face similar dilemmas. Increasingly, these younger folks realise that making pension provision, starting with auto-enrolment and supplementing it with separate savings, is the only way to ensure there'll be enough money in the pot to enjoy a stress-free retirement. Yes, it sounds light years away, but the sooner Ms Millennial and her pals start saving, the better - because the state can no longer ride to the rescue.
TAM Asset Management Ltd offer investors (including Ms and Mr Millennials) the opportunity to invest in a variety of Investment ISA portfolios from as little as £25 a month. For further details, please visit the MoneyMapp website.
THE WEEK IN NUMBERS
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For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.