We all have a vague idea about how little young people engage with pensions but figures from the Office of National Statistics (ONS) suggest the problem is worse than most of us thought and is by no means limited to pension saving. Astonishingly, most people aged between 18 and 29 don’t have a single savings account and 6% of them are in debt to the tune of more than £10,000 (even before allowing for student loans).
Slightly over half of 22-29 year olds have no savings whatsoever, with this proportion up to 53% from 41% before the credit crunch. Of those who do have savings, 1 in 10 have less than £100 and 40% have less than £1,000. On the positive side, 1 in 4 have savings in excess of £6,000 and 10% have savings over £10,000. They may well be saving for a deposit on a house, as only 1 in 4 own a house (with 1 in 3 still living with their parents and the rest renting). The number of these young people owning their own home has fallen by a quarter in the last 10 years.
Debt levels look troubling for 22-29 year olds too. The good news is that only 37% of them are in debt at all, compared to 49% a decade ago. More than a quarter of those who are in debt owe more than £6,000 and 1 in 10 owes more than £14,000. Those amounts will seem huge to the 47% of them that earn less than £20,000 per annum.
The problem is naturally worse for 18 to 21 year olds. The median earnings for this group is less than £10,000 per annum and only a quarter of them earn over £15,000 a year. It’s not surprising that 75% of them still live at home with their parents and they have average debts of £2,400.
These figures really bring to life the challenge of getting young people to agree to put aside some of their earnings to save for a pension that they won’t get until 2060 or whenever. The inertia of auto-enrolment is working pretty well but we might need to bring back compulsory membership of pension schemes once the contribution rates become more realistic to provide a decent pension.
My dad once told me how much he had resented the “2 and 6” he was forced to contribute to his pension scheme. Obviously I am too young to understand what “2 and 6” means but I gather it was a reference to some money that wasn’t a huge amount but would have come in handy for a newly qualified teacher with a young family. As he got closer to retirement he realised that it was actually the best thing that had ever happened to him financially as he knew that he wouldn’t starve in retirement and, more importantly, he’d still be able to provide for his wife and children. Perhaps the time is coming when pensions should again be compulsory so that young people will get the same protection in future.
Until then, I remain keen on the idea of getting people auto-enrolled as early as possible on a very low contribution rate, with gradual increases to an adequate rate over a number of years. I also like the idea of keeping the minimum contribution rate lower than the 15% that many commentators recommend. I’d be happier with a required combined rate of 10% (split evenly between employers and their workers) where members can choose to pay AVCs if and when they can afford them, with employers matching those too. That would allow people to concentrate on buying a house or raising young children when they need to while also encouraging them to top up their pension when they have a bit more disposable income later in life.