I work with a number of ambitious career people in their 20’s. They are in well paying jobs and have lots of surplus income. They want to build wealth over time so instead of spending all this extra money on designer clothes or gadgets, they want it to work for them. They are happy to put this money away for a number of years
When giving advice on investment, an obvious place to start is a pension plan. You get tax relief on the way in, meaning for every €10,000 invested, the government pay €4,000 of it. It then accumulates for decades without any deemed disposal or other taxation. But there is very little interest in pension planning from Millennials. If they are in a work pension, they will contribute the minimum amount into that but nothing more.
When I ask Millennials why they prefer investing their money instead of a pension, it all comes down to lack of access. You put your money into a pension when you are in your 20’s, it could be 40 years before you can access your money. As a financial planner, I think this is great. Invest €10,000 a year for 40 years at 7% annualised growth, you’d have €1.2m in today’s money. You would have tripled your money.
Pensions do not fit in with the plan. A lot of millennials aren’t in a hurry to buy a home but it is something that will be done in the future. And they want to buy it with the smallest mortgage possible. Tying money up in a pension doesn’t fit in with that narrative.
A lot don’t want to work into their 60’s either. They are working hard from their early 20’s in high pressure jobs. Being able to retire before 60 is an attractive proposition. If have a work pension, you can access it from age 50, but if you are funding it yourself, you have to wait until you are 60 before drawing down the pension.
I wrote about this recently, we look at our investments more frequently than our pensions. Why do we do this? Because it is real money that we can spend at any time. When it goes up in value, it makes us feel rich. Even though a pension is also real money, it doesn’t feel like it. You can invest in the exact same assets, you don’t get that same feeling when your pension fund increases.
Because pensions are investing for people’s retirement, they are more restrictive in what you can invest in. Day trading isn’t permitted and I am not aware of anyone who offers crypto currencies (although you can buy Crypto ETFs). This makes it boring.
While the government are talking of introducing auto enrollment to increase the coverage of private pensions, it seems that for this demographic, they are just too boring to be bothered with.
Let me know what you think? How can pensions be improved to encourage coverage? Drop me an email at steven@bluewaterfp.ie