Avoiding the black hole

New pension legislation comes into force this week – but as financial watchdogs warn that many young people are neglecting their retirement plans and the economic pressures on them mount, will the new rules be enough to bring them back from the brink? Asks Catherine Turner

A-Day, the biggest pension shake-up in the UK for more than a decade, finally arrives tomorrow (Thursday); but after months of City and media speculation, will it prove to be an advantage for the population as a whole?

The new rules will replace much of the existing pension legislation and are intended to make saving simpler, after claims that there is not enough information for younger people – and what does exist is confusing. But will a raft of new legislation come too late for a “spend now, save later” generation that, say experts, has done too little for too long to prepare for retirement? They say young people face a “financial black hole” in the future.

The issue has led the Financial Services Authority (FSA) to unveil a personal finance education campaign aimed at everyone from schoolchildren to office workers, while the TUC warns that “retirement reality will bite hard” for the younger generation. The organisation is launching a pensions advice leaflet to help young people understand their choices following the publication of Office for National Statistics figures, based on 2004 research, that showed just over one-quarter of working men and one-third of working women aged 18 to 24 had a pension.

Deputy general secretary Frances O’Grady warned at the TUC’s Young Members’ Conference last weekend: “Many [young people] are putting off saving or think they will be able to get by without their own pension. But if pensions saving is left too long, reality will bite hard for young people when they hit retirement.”

FSA research in 2002 found that younger people were more likely to think they will have improved standards of living in retirement than older people who had not yet retired, with 41% of 18- to 24-year-olds, and one-quarter of 25- to 34-year-olds thinking things will improve.

Experts say this confidence is misplaced and last week the FSA pledged to help more than 10 million people over the next five years. It says that despite being better off and having a broader education, young people are more ignorant about money matters than a generation ago.

Live for today

The regulator warns that half the people it surveyed were under-prepared for retirement. Almost half had a “live for today” approach to finances and more than 75% admitted not making any provision for a fall in income. A spokeswoman says: “Today’s 18- to 40-year-olds face much tougher financial services demands than their parents. They have to pay for higher education, come out of university in debt, have much wider access to credit and are susceptible to debt.” She adds that young people often feel safer making no decision on their finances than the “wrong” one.

“There is a lot of choice out there,” she continues. “Young people are faced with a huge array of products and knowing what is best for them can be difficult. One reason could be that they feel they have too much information. As a nation, we don’t think enough about financial decisions like pensions. We think about our wages and not beyond that. But personal finance and money affects our day-to-day lives in many ways, and we need to engage people to think about it more.”

The programme will include an overhaul of the FSA’s website and communications material, and roadshows at railway stations and offices. There will also be lessons and advice given in schools, colleges and universities. Many young people are currently “incapable” of making sound financial decisions with regard to pensions and savings says the FSA. “You can never be too young to learn, but it’s not just about knowing,” says the spokeswoman. “It is good for people to think about their pensions, but they also need to do something concrete.”

Market research consultancy Incite Marketing Planning believes much of the ignorance surrounding pensions planning and products could be down to poor communications. Recent research carried out for the company showed that financial services advertising did not reach 75% of the retirement market.

Incite director Graham Cannon says there is an even split between those putting extra money aside for retirement and those who, due to lack of awareness, apathy and confusion, have yet to do anything about it. Those aged 25 to 34 are the least likely to have made provisions for retirement, with 58% claiming they had not taken any additional action beyond their current pension. Meanwhile, Caroline Whytock, senior associate at Incite, adds that young people are using savings to support their current lifestyle but are not necessarily saving for the longer term. She says: “While the message about the need to save more for retirement is finally getting through to most people this isn’t necessarily enough to make people start actively saving, because consumers have very different needs, capacity and attitudes towards saving for retirement.”

Target different groups

Cannon adds that the research described five different types of consumer, including worriers, controlled savers and the disorganised, but found that current marketing messages tended to focus solely on controlled consumers, who have already made provisions. He says. “We wanted to show the financial services industry that it could achieve more by moving away from generic advertising. We have come to the conclusion that the financial services industry needs to take action to trigger people to take more responsibility.”

Cannon, in line with the FSA, is urging the industry to take action now. But perhaps the simplest solution, says the TUC, is to implement a national pension saving scheme, an idea recommended by the Turner Commission and under Government consideration.

The only problem is the Government is split at the highest level over the wisdom of Turner’s proposal, with Prime Minister Tony Blair for it, and Chancellor Gordon Brown against.

O’Grady urges Whitehall mandarins to be “bold and brave”, adding: “The simplest way to increase saving among young people so that they will enjoy a comfortable retirement is to ensure they have access to a decent work pension with some compulsory employer and employee contributions, as Turner has recommended.”

If the financial services industry does not succeed in getting young people to sit up and take notice, they risk falling into a pensions black hole when they retire.

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