Our savings and investment needs and options change as we go through our lives. People in their 20s with few responsibilities may have lots of disposable income and may be well able to afford to put a significant amount into savings plans or their pensions – but their lifestyle choices may well get in the way of that.
When they advance into their 30s, their lifestyles may well have settled down but their disposable income is being swallowed up by a lengthening list of demands such as weddings, mortgages, childcare, school fees, cars, family holidays, and that’s before food and clothes for the family are taken into account.
That doesn’t mean we should ignore savings and investments though. It’s just that we have to cut our cloth according to our measure and get some good advice to help us along the way.
Bernard Walsh, head of pensions and investments with Bank of Ireland, has noted a marked change in behaviour and attitudes towards savings and investments among people in their 20s and 30s. “It is very different for people in their 30s now,”he says.
“A feature of the market is that they are taking a lot longer to enter pension schemes. This is because they are having to save for deposits on houses at the same time as paying high rents in many cases.”
This is could be the cause of problems later on, he believes. “This is a real pity. They are missing out on employer contributions by not making contributions themselves and they are also missing out on the long-term growth potential of the pension.”
He also detects a changed attitude towards risk on the part of younger people, which he finds slightly surprising. “The other thing coming across with the younger cohort is that they seem a bit more risk-averse than in the past,” he notes. “The younger you are the more you should be maximising growth and willing to take a bit more risk. But this is not the case with many of them. When the market fell about a year ago, younger people were complaining about the loss in value of their pensions. I told them that it was actually good news because the fall meant they were buying in cheap and were going to get the benefit of growth on that in the long term.”
He believes people should be putting away as much as they can as early as they can into a pension. “Pension contributions are flexible,” he says. “You can increase and decrease or even stop contributions when necessary. The only real weakness in the system is that it doesn’t allow some drawdown along the way.”
Life stage
Simon Hoffman, head of intermediary distribution with BCB, says it’s not so much a matter of age but life stage. “It depends on what they are looking at in terms of the investment time horizon for their pot of money and their appetite for risk,” he says. “If they are in their late 20s or early 30s and have started a pension pot, they should be looking at a reasonable amount of risk because of the growth potential. That means investing quite a bit in equities, over a 30- to 35-year investment period – you can’t touch it. But you still have to look at their risk appetite. Will they be spooked by a fall in value?”
Both Walsh and Hoffman advise people to divide their available cash into different pots – short-term liquid cash to look after immediate needs, a rainy day fund of between three and six months’ salary for emergencies, and then longer-term savings and investments.
“When they are saving for their kids’ education, they want zero risk,” says Hoffman. “It is difficult to look beyond State savings for that, but you really get no return on it. It’s a question of what they are looking to do with the money and the key is to take advice. We have structured products which offer five to six years’ investment plus protection to guarantee at least 95 per cent of the value of the investment regardless of how the market performs.”
At a later life stage, the traditional approach has been to de-risk pension investments as people approach retirement. This is known as a lifestyle strategy. It may not be appropriate anymore, however, according to Hoffman. “The majority of people are in defined contribution pension schemes now,” he says. “And most of them will choose the approved retirement fund [ARF] route on retirement. This will see them continue to invest for the next 20 years and that means they need to take a bit of risk. That can be a difficult conversation. Some of it can be psychological. It’s a question of the different pots of money – the low-risk part for immediate needs and the part that is exposed to slightly more risk.”
Walsh agrees. “As retirement approaches, our investments should adjust to our stage in life. Schemes used to start de-risking about 15 years out but what’s really important is what you de-risk into. Most people are investing in ARFs now and they should be de-risking in a way that reflects how they will be invested in future. They might ask if they should be de-risking at all. If they are 50 years’ of age now, their investment horizon is not 15 years, it’s actually 30 years or more. A girl born today has an even-money chance of living to 100.”
Given that projected lifespan, it’s little wonder people’s attitudes to savings and investments are changing.