Life cycles demonstrate to us the trends in how people at certain ages tend to act. This article will focus on younger people, i.e. those aged between 18 – 30. This age bracket is often referred to as the ‘vulnerable years’. Typical attributes of those in the vulnerable years are that they are a young couple who are dependent on one income with high family expenses and a high need for protection from death or illness. This article outlines some ideas for investments for young people who are looking to better their financial future.
It is never too early to start to think about pensions and taking pension advice. With people living longer and the strain on the welfare system to support pensions increasing aswell as the so called ‘pension timebomb’ on the horizon, the importance of holding a privately held pension should not be underestimated. Those people in their vulnerable years may feel like they have too little additional income to contribute to a private pension but regular contributions do really stack up over the long-term as demonstrated below.
The UK government offers a tax relief of 20% on contributions. This means monthly contributions as small as £50 per month (£62.50 with tax reliefs) would create a pension pot of £750 at the end of 12 months, before any growth or interest. If this is done each year during the vulnerable years your pension pot would be £9,000 by the age of 30. If compounded with an average growth rate of 5% each year this would leave a total of £12,258.75. Many people at this age will not have even started to think about planning for retirement or a private pension putting you ahead already.
A key aspect of pensions is that they are a very long-term investment. If suitably planned it could be seen as an investment for young people because it gives an investment horizon of 40+ years. Having such a long-term investment period means that the scope for growth is huge and with carefully picked investments which are regularly reviewed, it can lead to a final pot which is much greater than total contributions. Take the above example; if this level of contribution is maintained for 45 years, assuming the growth rate of 5% annually a final pot would be £122,994.85.
(Please note that these figures are not guaranteed and are used for illustrative purposes to support the idea that the earlier you start, the easier it is to accumulate a decent sized pot for retirement due to compounded growth).
Help to Buy and Lifetime ISAs
With it becoming increasingly harder for young people to get a foot on the property ladder due to the size of deposits, many younger individuals will have to start to think about investments and savings at a younger age. People in the so called “Generation Z” (those born between the mid-1990s and 2000s) are typically pessimistic about their chances of buying property and believe that they will be renting until they are into their thirties.
Multiple government schemes have attempted to correct this, namely through the Help to Buy ISA launched in December 2015 and the Lifetime ISA rolled out in April 2017. These are two key examples of investments for young people which can help get them get on the property ladder as the government boost the savings by 25% in each case. The differences between the two can be found below.
Help to Buy ISA
The use of the Help to Buy ISA is in the name, with this type of scheme aimed for people over the age of 16 who want to save for the purchase of a first property. Savers can contribute up to £1,200 when the account is first opened and following this, contributions of £200 a month maximum can be made. The maximum amount to be saved in a Help to Buy ISA is £12,000 and with the government’s 25% bonus upon the purchase of a house, a total of £15,000 can be used. Withdrawing your money from your Help to Buy ISA to purchase a property comes with no penalty. The restrictions in place with a Help to Buy ISA is that the government bonus can only be used for this purpose and it limits property purchases to £250,000 or less outside of London and £450,000 in London. From the 30th November 2019 you will no longer be able to open a Help to Buy ISA and any bonuses gained through the scheme must be claimed by the 1st December 2030.
The newer of these two ISA schemes is different to the former in numerous ways. Firstly, as before, the name suggests a key difference, as this ISA can either be used to fund a deposit of a first property or alternatively, can be used in retirement once the holder reaches age 60. The maximum amount that can be contributed to a Lifetime ISA per annum is £4,000 which correlates to a maximum yearly bonus from the government of £1,000. As this scheme can be opened by someone who has not owned a home, is between the ages of 18-39 and can be used until the age of 50, an individual could potentially receive a maximum bonus of £32,000 from the government.
The restrictions on the Lifetime ISA include a 25% access charge should you wish to access the funds for a reason other than buying your first home, accessing your pot after reaching the age of 60 or if you are terminally ill, with less than 12 months to live. This means that if your Lifetime ISA was worth £5,000 (£4,000 contributions + £1,000 government bonus), you would be charged £1,250 to access your funds, representing a net loss of £250. When purchasing your first property it limits the house price to be £450,000, anywhere in the U.K. Lifetime ISAs also allows you to invest in Stocks and Shares. These can be seen as significant investments for young people as it could allow your pot to grow at a quicker rate than an interest rate if invested well. However, it is important to note that the value of your investments could fall as well as grow.
|Help to Buy ISA||Lifetime ISA|
|Age to Open an Account||16+||18-39|
|Maximum Contributions||Initial contribution of £1,200 and £200 p.m. after||£4,000 per year|
|Government Bonus||25% once a property has been purchased||25% within 6 weeks of contribution|
|Maximum Size (w/ Government Bonus)||£15,000||£160,000|
|Withdrawing your Funds||No penalty for withdrawing your funds||25% charge on withdrawals besides first property purchase, reaching age 60 or terminal illness.|
|Property Size Limitations||£250,000 or £450,000 in London||£450,000|
|Stocks & Shares||No||Yes|
In order to plan for a more secure financial future investments for young people are important. It can offer you greater comfort in retirement through regular contributions to pensions or alternatively allow you the opportunity to purchase your first property through either a Help to Buy ISA or Lifetime ISA.