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The Institute for Fiscal Studies has recently made the case for pension saving in later life, saying people should make the bulk of their contributions after middle age – but what seems perfectly logical in theory is quickly dismantled by real life.
In a recent newspaper article, IFS director Paul Johnson said: “Look at the present generation of pensioners. They are significantly better off on average than they were through most of their working lives.”
He continues: “Once you account for the fact that most pensioners don’t have to pay for a mortgage and don’t have children to provide for, they have a higher disposable income than they had when they were in their thirties and forties. That means they saved too much. They would have been better off doing less scrimping and saving when they were younger and instead enjoying more family holidays, meals out or perhaps buying more furniture.”
He gives the example of friends who had to sleep on a mattress when they were young because they couldn’t afford to buy a bed – all because they were forced to contribute 20% of their salary to pensions.
So what can we learn from this? Not much, other than that the generation Johnson talks about has very generous pension benefits, which were funded accordingly.
Don’t get me wrong, I really value most of the studies by the IFS; they frequently point to areas where reality does not match the myth, for example when it comes to pensioner poverty, or rather pensioner wealth. But on this one, I would disagree. The notion that today’s young people are oversaving for pensions at 5% minimum contributions from age 22 seems exaggerated at best.
This applies to millennials and GenZ; but why not also consider GenX, to which I count myself. My personal favourite example is that when freshly arrived in the UK, having had to pay a double rental deposit (for the crime of being foreign) and only receiving my first pay cheque after six weeks, I couldn’t afford cutlery for a while and so had to use plastic forks that I used to get from supermarkets. Did I oversave into my pension? What pension?
While it would have potentially meant some more short-term scrimping, it's fair to say I would have preferred putting something away for old age. If not much more it would have given me the feeling that the government, my employer – anyone – seemed to care about whether I’ll have a roof over my head later on, because the future can seem a very insecure place when you are young.
Some of the areas where the IFS sees scope for redirecting savings to pensions later on are mortgage payments and children. Repaying a mortgage, it has been found, does not lead to people increasing their pension contributions, which is arguably where pre-pensioners are missing a trick. It might be worth thinking about whether mortgage providers should have to send a message to people just before the final payment – suggesting that they put the extra money to good use.
As for children... don’t get me started. Suffice to say that I commented during the event which accompanied the research launch that children don’t tend to ‘cease’. What’s more, they often become more expensive as they get older, and once self-sufficient are quickly replaced by expensive grandchildren – as I’m sure many of you could attest to! So what’s left? Saving before you have any... in other words, when you are young!