Hello and welcome to A Little Bit Richer, with me, Iona Bain, brought to you by legal in general. Now, there's a lot of debate online about whether you should prioritize getting on the housing ladder or perhaps put off the property dream to save more into your pension. With house prices rising and traditional retirement paths shifting, millennials are
stuck in a financial tug of war. Should we prioritize our pension contributions so we have a more comfortable retirement or buy a home so we aren't paying rent in our later years? Well, I can't think of anyone better to talk to today about this topic than consumer editor
at the Financial Times, Claer Barrett. At the FT, Claer writes her weekly Serious Money column, presents the Money Clinic podcast and is behind the newsletter, Sort Your Financial Life out with Claer Barrett. She's also the author of the bestselling book, What They Don't Teach You About Money. Welcome, Claer.
Oh, thanks for having me, Iona.
Claer, can you set the scene and explain why this debate around property versus pensions has come about?
I think it's always been there, because saving for retirement, saving for a property, ask any young person at any point over the last 20 or 30 years, " Which one are you going to prioritize?" Of course it's going to be property because we want to get on the housing ladder. We've seen what house prices can do and the impact of owning
an asset, which could rise in value. No guarantees, of course, that that's going to keep happening, certainly keep happening at the same rate in the future, but it's been a one- way escalator for generations past. And you can also tell your landlord to do one. And I think for many people it's that that's the motivation, the insecurity of living in rented accommodation as well as the huge
cost. Maybe you're living with your parents for longer in order to save up for a property. These are all factors that are pushing young people towards prioritizing property over retirement, which seems like a very, very distant dream.
And when it comes to pensions, a lot has changed over the past 30, 40 years. Now, the responsibility is being put much more onto the individual, isn't it, in terms of saving for retirement?
Yeah, in the good old days, the sort of pension that you would retire with would give you an income like a salary every year of your life until you died. Nowadays, all of that responsibility for the vast majority of jobs, unless you work for the public sector, teaching, civil service, doctors, policemen, fire service, you'll still have one
of those more generous final salary pensions. If you're working in the private sector, it's got a much less generous pension system, defined contribution is what it's known as. So much jargon in the pension as well. But what it essentially means is you're
paying him money, your employer's paying him money. You've still got a heck of a lot of tax advantages if you're saving money into a pension, but the end of the day you're going to end up with a pot of money that you've saved and invested, and hopefully grown over the years, but it's up to you to decide what you want to do with it. So you've got to manage that money for the rest of your life.
Now, this is where the pension versus property debate gets a bit more interesting, because of course your biggest expense right now, if you're somebody who's young and working, is likely to be your rent or your mortgage. Now, if you manage to get on the property ladder, mortgage payments nowadays a lot more expensive 'cause house prices have risen, but eventually you are going to pay that mortgage off,
you would hope before you retire. And then, that's going to be a big cost that comes out of your budget. Whereas if you've never managed to get on the property ladder, you're going to have to fund a rent
from any money that you save into your pension. So, this is a real concern to people who are maybe a few decades out from retirement, haven't yet managed to get on the property ladder, and it just adds urgency to this problem.
So saving for property can not just benefit you in the here and now. It could actually help with your retirement as well, but are there circumstances in which people might be better off renting and where there maybe isn't that urgency to save up money for a home?
Well, I means so much of this comes down to your individual circumstances, but I think that the Bank of Mum and Dad really are the big unspoken in this conversation. Pretty much everyone who is in their 20s or 30s, if they are getting on the housing ladder, are going to
have some kind of help from their families. May not be Mum and Dad, it might be Gran and Granddad, but nevertheless, I think L&; G has worked out in the past, the Bank of Mum and Dad is something like the seventh or the eighth- biggest mortgage lender technically in Britain if you were to rank them among them. Now, you might think, " Okay, well I'm not ready to
buy yet." It's a lot of responsibility that comes with owning a home.
And you can make the wrong decision, buy the wrong place at the wrong time, and make a big loss.
Yeah, and also the transaction costs. If you're not sure about what area you want to settle in and live, if you buy somewhere and then sell it and buy again, you're going to be hit with two lots of stamp duty. So, it doesn't pay to hurry when you're making decisions about property. But increasingly younger people, Gen Z as they're known, are thinking more about investing first rather
than saving in cash and saving for a property. Because they know if they haven't got any help coming from their family, just saving in cash and getting the interest on a cash savings account is not going to be enough
to get them there. So I've seen a couple of surveys come across my desk, big surveys in the last couple of months at the FT that have said that Generation Z are the most active generation when it comes to investing money in the stock market, using stocks and shares, ISAs, so it's still tax efficient. And hoping that in the long term that will give them more bang for their buck to help them get on the property.
One other little factette that I'll slip in, 'cause this is something that I used when I got on the property ladder in my late 20s, there's a government scheme called the Rent a Room Scheme. If you let out a furnished room in your home, it doesn't have to be permanently to a lodger, although that's what I did, you could do Airbnb and be renting it out during
the week, for example. You can make up to seven and a half thousand pounds tax- free from doing that per tax year, April to April, and best of all, you don't even need to Claer it on a tax return. So, your property could be earning money for you
if you've got a spare bedroom. And that's something that helped me get over the line when I was doing all of my sums and working out what mortgage, what property, what area I could afford to live in.
But also, if you have then got on the property ladder and you are able to use that kind of scheme, you could put that cash into your pension, perhaps.
Oh.
You see?
Very good, Ms. Bain.
And also, saving for a property doesn't just help you in the short term. It can also help you in retirement.
It can. So, all of the main calculations of retirement living standards, they've come up with these rules of thumb to give people an idea of how much money they would need to aim to provide for themselves every year in retirement to have a basic standard of living, which is basically the state pension plus something else, an intermediate and much more affluent style of living. But all of
these calculations assume that you've paid off your mortgage. Now, the most popular mortgage term used to be 25 years, now it's 30 years. It's also possible to get a 40- year term if you're a young person. Now, it's great you can stretch out those payments and make them more affordable so more people can get on the ladder, but ultimately, over the course of 35, 40 years, you're going to be
paying back an awful lot more interest. So that's compounding again, but in reverse. Compounding working against you. So, the other thing that you need to look at, especially as your career progresses and your salary starts to rise is, " Is it going to be worth it for me to
do an overpayment on my mortgage? And am I going to get more bang for my buck doing that or making an overpayment into my pension?" If you are in that lucky position and you have got a bit of extra money that you think you could sink into both.
And ultimately, it comes down to tax. As I said before, if you're somebody who's earning over 50,000 pounds or certainly somebody earning over 100,000 pounds, then almost certainly the pension will give you the bigger bang for your buck.
But equally, if you are making even a small overpayment on your mortgage over time, particularly if there's two of you and you're both doing an extra 100 quid a month to pay off the mortgage, it's really, really surprising how quickly those savings can ramp up, knocking years potentially off your mortgage term and saving you thousands in interests. So just be aware, be curious, don't be afraid of doing some maths.
'Cause I think what's clear from our conversation is that it doesn't have to be either/ or so long as you get the facts and you come up with a plan. I think one of my favorite mottos when it comes to this whole area is the art of the doable. Figure out what is doable. And it's very encouraging, actually, when you said before, Claer, that something is better than nothing when it comes to your pension, but it is
more about starting early and staying consistent. When it comes to how you decide to save for a house though, do you think that perhaps we need to bear in mind some of these issues around having a mortgage term that lasts well into our retirement, potentially creating problems for ourselves further down the line? If we are in a position to perhaps not take out quite so large a
mortgage, would that potentially be a good idea? Obviously not possible for everyone, but maybe for some.
It's ironic, isn't it, that we're having this huge backlash now against remote working? Because this for me was the real big hope for younger people. You could afford to live further out, buy a cheaper property, maybe in a slightly nicer, more countrified location. And if you've only got to go into the office physically once, twice, maybe even three times a week, you're going to save money on
the commuting costs as well. You can get a part- time commuter ticket. So, this other way of doing things were starting to open up. Now, I firmly believe that we will keep hold of the many benefits of flexible working, I have to say. And I think the benefit for workers is so great that people would rather be able to work remotely than have a 10% pay rise, according to one poll, which we recently wrote about in
the FT. And you do have a choice of who you work for, and you do have a choice of the pension scheme of that employer. So, do find out about what different companies are offering. Many, it will only be the bare minimum of also enrollment, but many employers
are much more generous. And that is a real bit of investigation work to do in your sector, in your industry, finding out from colleagues, from people, from like LinkedIn, sites like Glassdoor, who are the real Rolls Royce employers in your sector, and how could that brighten your financial prospects?
Give us a sense, Claer, of what a generous pension would look like, and what maybe people could be looking out for in terms of a good offer.
Okay, so the bare minimum, also enrollment, is that the employee pays in 5% of their salary before tax and the employer pays in 3%, so 8% overall. That's the bare minimum, so long as you earn more than about 10, 000 pounds a year, say, roughly speaking. But a more generous employer might pay 6% into the staff pension instead of 3%.
A really generous one might pay 8%. I think if we get to that stage where people are much more empowered to ask questions about their pensions early when they've got time crucially to do something about it, the outcomes for everyone, future taxpayers and governments included, will be much, much better.
That's really interesting, 'cause if you go to a dinner party, once you get to a certain age, the conversation inevitably turns to mortgages. Or even if you're just out in the pub or meeting friends.
House prices.
House prices, mortgages, house-
Renting.
Exactly. " How can we get on the property ladder?" That
Landlords.
is the question. Maybe we need to start having a more balanced conversation. Then that way, we can start to have a slightly more balanced financial future.
And I think Future Fund would be a better name for pensions, because I say in my book, you think pension, you think pensioners. Nobody wants to get old.
So, we've talked about how lots of younger people might feel like this is a totally unachievable dream. Have you got any glimmer of hope for a young person who has one advantage on their side, and that is time? What can they do with that time in order to try to achieve both these goals, or at least do something for themselves that will benefit them in the future?
Yeah, feel more positive rather than full of despair.
Exactly.
Okay. So doing something, as I've said, into your pension. Also, if you're self- employed, that is a bigger feature of the UK labor market, the so- called gig economy. And of course, you don't get the auto- enrollment pension with that. You've got to be more proactive and start a small pension fund saving for yourself. More and more young people, especially if they're working freelance, are going to
fall into that category. So again, educate yourself. Something small is better than nothing at all. But then when it comes to saving for your first home, the lifetime ISA, yes, there are caveats to this product, namely the property price cap of 450, 000 pounds, which has never risen in the near decade since this product was introduced. But you can save up to 4, 000 pounds a year and
get a 25% government bonus. Now, you can do that in two ways. You can do it in cash or you can do it as a stocks and shares ISA. So if you're looking at a 5, 10, 15 year period to save up for a house, and you are somebody who wants to take a bit of risk with your money, then it is possible to invest that. But the fact is, a lot of us are not going to be able to afford to buy a house.
This has been such an interesting discussion, Claer. I would love to end on your top three things to remember in the property versus pension debate.
Okay. Both are important and valuable assets, so try not to neglect one completely in favor of the other, but equally remember that even if you can only save something small into a pension and you're young, over time, those amounts, as I found out to my cost, can really add up, especially if you're benefiting from that free money that your employer is paying into. And finally, I'd just
reiterate, there are tools online. There are mortgage calculators that you can look at over payments. There are calculators where you can look at how much pension payments might grow to over time. Don't be afraid to go and use them and have a play. The situation may not be quite so depressing as you think, but an informed choice with what you're doing with your money is always going to be better than a guess.
Hear hear. Couldn't agree more. Thank you so much, Claer.
Thanks for having me.
Loads to consider there. Next time, we're talking all about inheritance with Dr. Eliza Filby. This podcast is brought to you by LNG. You can keep up with the show on YouTube, TikTok and Instagram at Legal &; General. I'd love it if you could follow the podcast, leave us a review, and help others get a little bit richer, too. Thanks for listening. Until next time, see you soon.