What to teach your 20-something self, about pensions?

Posted on by FIRE v London

I have volunteered to do a simple class at work for a few younger folk about pensions.  I’m promising them Five Simple Things to know about pensions / saving.  What should I tell them?

My audience are young, ambitious Londoners.  They earn between £20k and £40k.  None are yet parents.  All aspire to get on the housing ladder.  They are smart but not obviously financially literate. They know pensions are an important matter but it wouldn’t be urgent for any of them.

Asking myself what I would have wanted my future self to tell me about pensions/savings/similar when I was approaching my 30th birthday, I am musing over:

  1. The rule of 70, and the importance of doublings. And thus the importance of starting early.
  2. The impact of fees and taxes.
  3. Pensions (a tax bribe now, to bet on the government not stinging you later) vs ISAs/divi allowance (the place to feed assets into, if you quite sensibly don’t like pensions).
  4. Auto-enrolment.  How it works, and why you should accept any employer match like your life depends on it.
  5. Diversification: the only free lunch.  And your insurance against Equitable Life, MF Global, etc.

This still leaves such chestnuts as:

If you could only cover five things, what would they be? Have I got the priorities right?

14 thoughts on “What to teach your 20-something self, about pensions?”

  1. I wouldn’t bother with diversification. In almost all cases the pension provider default fund will be a relatively low cost fund of funds which is already diversified enough. The key message really should be to just start paying into a pension ASAP without being scared off by complications such as diversification at this stage.

    Really emphasise how beneficial it is to start early

    Also perhaps look at some projections to challenge their perception of how much they’ll have to retire on. Ie: The difference between someone who just relies on state pension and the different between someone who puts in 4% + 4% matched for 45 years.

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    1. Thanks @ere. Thoughts on the wisdom of funnelling your ongoing house deposit savings into an equity isa? I feel this is a good plan because equities and property are loosely correlated anyway, long term returns are much higher on equities than cash, liquidity is excellent, and you’ll learn stuff that will suit you well: especially if you never end up buying that house after all. Is this fair?

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      1. I was never keen on this idea, it depends on how long you’re predicting it will take to save for a house deposit. Personally I achieved it in 3 years which would have been too short a timespan to really consider investing.

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  2. The main point is to power home the importance of saving into a pension as soon as possible and taking advantage of the employer match and the tax bribe.

    I wouldn’t sweat on stuff like diversification or fees or age in bonds etc.

    Of more value could be examples of the effect of compounding from saving earlier rather than later.

    As per ERG, I’m not sure sticking cash that they’re saving up for property into equities would be a good idea, unless they’re leaving the cash in there for at least 10 years. So equity ISAs might be good as part of their long term pension planning, with cash ISAs better for their savings for property?

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  4. Agree broadly with the comments above. Here’s my take:

    1. Start asap (show them the difference between the person who started at 21, gave up and then just let the money compound vs. the person who waited until they were 31);
    2. Grab any matched deals you can get your grubby mitts on;
    3. If you start early, you don’t have to put as much in, so save up other money for house deposits, weddings, cars etc in an ISA… And yes, I would recommend equities as a house deposit is not gonna happen overnight. Keep it simple and long term invest in a vanguard life strategy 80;
    4. Explain about how much they’d need to live off when they’re retired i.e. not that much as the mortgage will be gone and they won’t be commuting to work etc;
    5. If they have choice in their investments for company scheme, go with diversified globally spread funds e.g. UK, USA, Europe, pacific, emerging markets.

    I’m not a financial advisor!

    Cheers

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      1. No auto-enrolling?

        If no, or for some daft reason they decide to opt out, then perhaps this is where you could talk about SIPPS, investing in a broad range of diversified trackers (or simply Vanguard’s Lifestrategy 80% or 100%). Set up regular payments etc.

        Mention the different providers available, that they can vary in fees etc.

        Or if they don’t want/need to control the way their money is invested, stakeholder pensions.

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      2. Our (small, loss-making!) company doesn’t need to do auto-enrolling until late 2016 and isn’t planning to do anything until shortly before the deadline.

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      3. I’d say start with the cheapest sipp provider you can find that does free fund dealing (check monevator’s table) and get vanguard LS80

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  6. I’d tell them not to contribute to pensions unless (i) they’ll get free money from the employer, or (ii) get salary sacrifice, or (iii) avoid higher rate tax.

    I might also tell them to watch out for government reforms e.g. the possibility of three-for-the-price-of-two replacing tax relief. That would change the advice above rather dramatically.

    I might also tell them not to leave comments on monevator since one of the writers there is neurotically thin-skinned.

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  7. Hi FIRE v London

    I would discuss the concept of lifestyle inflation, and how if they take their pay rises / bonuses and invest them instead of buying a newer or bigger house / car / phone etc that they can start to accumulate a retirement pot. If you then explain compound interest hopefully they will be able to understand how they can start saving early.

    The main challenge is to avoid feeling that they are “missing out” if they don’t continuously upgrade.

    Best of luck in your teaching
    FI UK

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