A survey by Scottish Widows imparts some uplifting news: British millennials are optimistic about their future. Around 75% of millennial-aged Britons expect their quality of life to improve or at least remain the same in retirement, it shows.
Most millennials expect to retire around 63 years of age (Scottish Widows calls this “early” retirement, but until not long ago, retiring at 63 would have been considered pretty normal).
“This generation has expensive plans for their later years, with holidaying overseas (59%), trips to the cinema and theatre (48%), keeping up with the latest fashions and buying new clothes (28%) and eating and drinking out regularly (26%) in their sights,” the survey shows.
While it’s always good to see the young looking confidently to their future, they should take a better look at these plans and perhaps revise them down a bit, following the UK’s vote to leave the European Union. They should also perhaps learn from that vote and become more active and vocal in future political decisions.
No, Armageddon hasn’t happened after the vote, but it’s only been around two months, and nothing has in fact changed. But make no mistake, a period full of uncertainty lies ahead, and this is likely to reflect in lower returns on conventional assets held in UK pensions.
The earnings of UK companies, except for the biggest ones with lots of international exposure, are likely to fluctuate depending on what kind of trade deals they can obtain with their EU export markets and with other countries. Bond yields will remain low as central banks keep interest rates low and print money.
Skills shortages could also become a factor, as workers from the EU might be deterred from coming and working in the UK by bureaucratic barriers such as work permits or by lower potential earnings compared with the eurozone because of a weaker pound.
Yes, it might be possible to import skilled workers from outside the EU; however, education systems are not harmonized in those areas like they are within the EU. It’s true that American and Australian education systems are very similar to the British one, but these countries are usually destinations for UK emigrants rather than immigration sources for the UK.
Debt will also be a burden for millennials. On top of student debt they will also have to repay huge mortgages for properties whose prices might not rise at the same pace they did for boomers. Indeed, when boomers begin to sell their properties, prices might very well decrease, and many millennials risk finding themselves in negative equity quite quickly.
The central bank will keep interest rates low, so it’s likely that homeowners will stay afloat. However, there are two problems with this: first, it’s not clear that the central bank can control interest rates forever. UK interest rates could still rise despite the Bank of England monetary easing measures.
Second, if interest rates don’t rise, returns on investments and therefore pension pots will be much lower than what the current generation of pensioners enjoys.
The Scottish Widows survey puts the average pension contribution for a millennial at £214 a month. That’s £2568 a year, so let’s do some sums for a 30-year old hoping to retire at 63.
At an average annual return of 5% after inflation — which is what was assumed by pension funds before this low interest rates madness begun — this would mean a pension pot of £218,452, if the contribution stays the same throughout their time to retirement.
Changing the return to a more realistic 3%, the pot would shrink to just $148,251, while for just 2% it would be £123,351.
Let’s assume a rather optimistic 4% a year in return that can be drawn from a pension pot in the first situation (the £218,452 pot), once the contributor has reached retirement. The annual pension income that could therefore be drawn is a little more than £8700. Hardly the stuff to pay for foreign holidays and keeping up with the latest fashion. For the second and third scenarios, things are even worse: £5930 and £4934 per year.
It should be clear to millennials that they should become much more involved in British politics if they want their hopes of a rich (or at least satisfactory) retirement to become reality. To start, they should insist to be consulted about the shape of the post-Brexit UK. After all, they and their children will be the ones living in it.
Seen in this light, a referendum among the young on the Brexit conditions would seem like a fair idea.