Retirement’s Biggest Challenge is Addressed to Millenials

Regardless whether the current and apparent retirees of the United Kingdom recover from the defined-benefit pension crisis, millenials will always be at the shortest end of the stick.

One of the biggest challenges millenials face is that they will need to save 18% of their meagre income to maintain their current standard of living. They must begin as soon as they receive work.

It might seem a small amount but about 60% of a millenials’ income goes to paying for student loans.

According to Aon’s DC Member Survey 2016, about £1,400 is the average shortfall in pensions for every millenial member it has. Working with YouGov, the study had 2,000 DC scheme members. Corporations with defined contribution pensions are also showing signs that they may underpay their employees in the near future.

Millenials face the following challenges:

  • Twice the inflation rate for almost every consumable in the country.
  • No property and lack of collateral to gain loans
  • Doubling up to save on a property deposit
  • and a very unstable economy.

It would seem that for millenials, there would be no end to employment and there must always be a means to earn money even during retirement.

Pension Taxes Could Reach £5bn By 2035

According to the Office of Budget Responsibility, the UK may have to pay about £5bn in taxes by 2035 as pension tax changes come into effect.

The report published by the OBR on Tuesday showed changes in taxation for private pensions and savings. Some employee freedoms to access their retirement funds from the age of 55 introduced by the former chancellor and results on these new policies were also published.

The new policies include lowering the amount workers can put into a pension yearly without a £40,000 tax as long as it remains at a £1m maximum.

The ‘significant changes’ said by the OBR to the manner private pensions and savings were taxed ‘shifted incentives in a way that makes pensions saving less attractive for high earners.”

According to a Treasury spokeswoman:

“The government wants to ensure people can save in a way that works for them, for both the short and the long term. That’s why we continue to support pension saving and savers through new initiatives such as the personal savings allowance, the lifetime Isa and Help to Save.”

According to the OBR, there was a ‘small net gain’ to the public finances from Osborne’s changes. However, it can become a net cost in the long term. The pension taxes paid for the reforms could reach about £2.3bn in 2018 and 2019. It can possibly hit £5bn by 2034-35

The small amount could add 3.7% of GDP to the public sector net debt over a 50-year period.

Can You Truly Use Buy-to-Let as Your Pension?

Property is king for a retirement plan according to most real estate brokers. But that’s them telling you to buy their products.

The root problem is, owning property can be very expensive even for pensioners.

By 2017 will be new lending rules that many speculate would make it difficult to get large buy-to-let mortgages.

The Telegraph published a post whether or not pensions retirement based on buy-to-let investments is feasible.

Using historic investment and housing data AJ Bell modelled how much £100,000 would grow (in capital and returns) over 10 and 20 years in three scenarios.

It compares investing in a pension (assuming a basic rate taxpayer) with someone buying a single buy-to-let property without a mortgage, and with someone buying three properties and borrowing to do so.

In the third scenario, the original £100,000 is split into three where each third becomes a 25pc deposit on a property.

Total borrowing is thus £300,000.

Stamp duty, tax and other costs are factored in with the property investments.

Over the first 10 years the £100,000 pension grows to £203,612 after charges – assuming stock markets perform in line with the past decade, delivering 5pc per year, total return. No income is being taken at this point.

At the same stage, the single buy-to-let property has increased in value to £123,095 (assuming again the past decade’s returns of 27pc are repeated) and yielded £41,180 in rental income, a total return of £164,275. Meanwhile the value of the equity in the three buy-to-let properties has grown to £171,600 and attracted rental income after mortgage costs and tax of £72,420 – giving a total of £244,020.

Pensions clearly beats a portfolio of just one property, but investors willing to take more risk – both in taking out mortgage and managing multiple properties – are well rewarded.

Fast-forward another decade – 20 years from the first investment – and the picture is much the same.

Even when income is taken at a rate of 4pc a year from the pension pot, it still beats the total returns on a single buy-to-let. The three property portfolio does produce £42,000 more than the pension over the 10 years but again, this comes at far greater risk.

Tom Selby, a senior analyst at AJ Bell, said: “Unless you are prepared to take on multiple buy-to-let properties and borrow significant amounts of money to do so, a pension is going to be the easiest and most profitable way to save for your retirement.

“You can start saving in a pension from as little as £1 per month via a direct debit. For property you need to have a deposit, probably of around £20,000 to £30,000, but most people can’t afford a deposit on their own home let alone a second property for investment purposes.

“Really the debate should not be around whether property is an alternative to a pension but whether property would make a good addition to someone’s overall retirement income strategy once a base pension has been established.”