Amidst a cost of living crisis, increasing rates of inflation and rising mortgage costs, there has never been a better time for young people to seek out financial support in order to secure themselves a comfortable future after their working lives are over.
According to Scottish Widows’ Retirement Report 2023 (SWRR), those in their 20s are least likely to be on track for a minimum retirement lifestyle, which is defined by the Pension and Lifetime Savings Association (PLSA) as having enough money to cover all of an individual’s needs with some left over for fun.
People in their 30s, meanwhile, are set to achieve the best retirement outcomes thanks to their strong savings behaviours, plus the benefits accrued from automatic enrolment to a pension scheme and securing solid investment returns, the SWRR says.
Andrew Sutherland, an Edinburgh-based financial planner with Acumen Financial Planning, explains that the main challenge for young people financially planning for their future is gaining a high enough savings rate for their pensions.
He believes the importance of pension compounding – where investment growth on both earlier growth and the money contributed – therefore cannot be overstated.
“Over the long run, you are looking at global markets which can return 9 or 10 per cent on average a year in the long term, and that means, with the money contributed, those pensions can double in value within a decade and continue to compound that over time,” explains Sutherland, who has 12 years’ experience in wealth management.
“You can be on track for a comfortable standard of living in retirement within a reasonable age, but if you do not get into the compounding process early enough, it is going to cost you a lot more later on to achieve that same retirement.”
Another key challenge for the next generation is the ever-increasing costs of housing.
According to the SWRR, one of the main reasons people in their 20s struggle to save for retirement is largely due to their focus on housing as a priority.
Sutherland echoes this sentiment, observing that some people are now borrowing 11 times the average UK salary, in an environment of rising interest rates, compared to four times the average during the mid-90s.
He maintains: “The cost of borrowing is massive, and so you want to be on the property ladder as quickly as you can to spread that cost over time.”
A very small number of Generation Z have been identified as being financially healthy, according to a report by market intelligence agency Mintel. It points to a study sourced by Marketing to Gen Z, which claims this minority group understands how to maximise use of financial products and is ready to fund their future.
So how do they and others of their generation take the next step?
No matter how far away retirement is, Sutherland and the skilled Financial Planning Team at Acumen are supporting adults of all ages to identify, plan and reach their financial goals. He points to the wealth of good financial habits that generations Y and Z should be making use of sooner rather than later.
One crucial task is to manage and understand bad debt, he says, for example to differentiate between borrowing for something like a house or a rental property which will appreciate in value so the debt is valuable financially, compared to borrowing for something which will depreciate or is unnecessary so isn’t helpful or valuable financially, such as credit card debt.
“Making use of things like a lifetime ISA is really important,” Sutherland adds. “You get your tax breaks with that and your 25 per cent bonus on any contributions up to £4,000 a year, and that can only be used for your retirement or for a first-time house purchase.”
While many of Acumen’s clients tend to seek retirement advice and support when they are close to that life event, the team believe that it is imperative for people to seek financial counsel much earlier.
According to the Financial Conduct Authority in 2017, only 6 per cent of 18-34-year-olds do so, which is one of the reasons SpringGen was recently launched. It is part of The Financial Planning Group – working alongside Acumen Financial Planning – and provides high-quality advice to new investors, with affordable service packages to suit all needs.
Sutherland says: “The value that can be added to young people through financial advice early on in life is massive, because that is going to allow young people to develop and maintain good savings and spending habits, avoid bad debt early on, and give them the compounding impact of that over decades.
“With the coaching of an experienced financial planner, that will be really valuable. It will allow people to really think critically about their lifestyle, what they want out of retirement, and really establish what they want once they are retired.”
Acumen Financial Planning offers high-quality advice from qualified professionals across a range of services, including pensions and retirement, savings and investments, and tax planning.
