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