Monday, 21 January 2013

Modern Young Finance: Weekly Round-Up 3


Well, 2013 is finally with us and the first round-up of the year is dominated by pensions and financial education. Steve Webb MP, the Pensions Minister, revealed plans for a new, simplified payment system, which, he hopes will make pensions fairer for low earners and working mothers. We, in turn, look at how it might affect younger people.
Also this week, there has also been much debate centred around financial education: a private members' bill by Thomas Docherty MP was introduced on Friday Jan 18, although the formal implementation of financial education lessons in schools looks to be some way off. (You might want to take a look at the blog I published earlier this week in response to the detractors of this initiative.)
Other topics this week include a new US study on credit card debt amongst young people, and the implications it may have on similar problems in the UK, and the pummelling that savings rates are getting at the moment as a result of the Funding for Lending scheme. We hope this won't encourage younger people to stick with saving for the short term at the expense of effective long-term financial planning.

The Government's White Paper announced on Monday unveiled sweeping new changes to the basic state pension. Under the new rules, which are due to be implemented from April 2017, all new pensioners will qualify for a 'flat-rate' payment of £144 per week. The aim is to simplify pensions - currently, the basic rate is £107, with various means-tested top-ups. 
It should also make retirement planning easier, especially for young people, who stand to benefit more over time from higher risk investments than those closer to retirement. A flat rate for everyone and the disappearance of pension credit for low earners will circumvent the need for means testing.  Under the means tested system, the level of savings an individual had was amongst the factors taken into account when considering how much pension credit to be awarded. This meant that, perversely, lifelong savers risked being penalised. This should change - and anything that encourages financial prudence and forward thinking ought to be considered a good thing. 
But, unfortunately, where young people are concerned, simple does not always mean better. Many of those retiring (read the IFS's analysis here) after 2050 could actually be worse off under the proposed new system, as they will have to work longer - the retirement age is set to increase to 66 from 2020 and 67 from 2026 - and will, from now on, have to pay higher National Insurance contributions. 
You can read the White Paper here and anyone still unclear can contact the Pensions Advisory Service
US research has found that young people are paying off credit card debt more slowly than previous generations - and this has implications for their UK counterparts. The study, from Ohio State University, was based on 13 years worth of data, and involved respondents aged between 18 and 85 years of age. It found that not only do those born between 1980 and 1984 have substantially more debt than their parents' and their grandparents' generations, they are also paying it off more slowly - about 24% slower than their parents, and about 77% more slowly than their grandparents. This is coupled with the fact that younger people have higher levels of student debt, so may find it harder to pay back unsecured debt.
The authors were concerned that this could encourage a future debt crisis - when these young people become elderly, it is likely that they will still be indebted.
However, the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act has led to higher minimum repayments on credit card debt, and the authors of the report predict that this could jolt younger people into paying their debt back more quickly. This is because it will help to prevent interest payments from building up, and may even eliminate debt several years early. The UK Government looked at increasing minimum payment requirements on credit cards back in 2009, see the Consumer White Paper here, but little has changed tangibly over here, despite strong support from campaign groups. 

We'll have to wait to see new developments unfolding in 2013. There does seem to be an emerging new pattern though, of young people looking for savings accounts which offer easy access to their savings. This is no doubt because of the uncertainty surrounding pensions and savings at the moment.  
One of the chief threats to interests rates and hence long-term savings for young people is the current uncompetitive nature of savings accounts. We are likely to see more and more savings accounts closing, and interest rates on savings staying low as the Goverment's Funding for Lending continues to batter returns. The Funding for Lending scheme was introduced to give banks access to cheap money to encourage them to lend to consumers - primarily to help more (young) people onto the housing ladder. While it has led to a modest increase in mortgages taken out over the last quarter, it has had the unintended consequence of cutting rates on savings accounts. An article published in the Daily Mail says that nearly all rates are now below 3%, since banks have less need to raise capital in this way.
This article also touches on an ongoing Financial Mail campaign, to double the cash ISA limit to £11, 280 (which is currently the combined limit for cash and stocks and share ISAs). Currently, you can only save half the maximum allowance in cash, even if you don't want to invest in stocks and shares. You can read more about this scheme, which is backed by a number of banks and building societies, as well as MPs, such as Alun Cairns, here.

Unfortunately, not much change here. Would-be first time buyers are still being frozen off the housing ladder, and saving for deposits is still daunting. However, an interesting article in the Evening Standard this week pointed to a new loan (this one is from Barclays, although other major banks will surely follow) which allows parents to use their savings to help their children get on the property ladder. Rather than having to use their savings, like other guarantor mortgages, parents are able to keep their savings in a separate deposit account. They will receive interest on this, and can withdraw their cash after three years, providing their children stay up to date on their mortgage repayments.  

Financial education 
A new report submitted by the All Party Parliamentary Group on Financial Education for Young People to the Department of Education called for more personal finance education for schoolchildren. Chair Justin Tomlinson MP said "We feel we have a duty to make the next generation of consumers be in a position where they can make informed and savvy decisions." This tied in neatly with a private members' bill (read here) launched by Thomas Docherty MP on Friday in a bid to make financial education part of the national curriculum.
Tomlinson and the APPG were perhaps also inspired by the unlikely news which emerged last week that bankers could soon be giving financial education to young people. Plans under consideration could see representatives from banks including Lloyds, Barclays and RBS giving financial advice to schoolchildren from 2014. Speaking for the APPG on financial education again, Justin Tomlinson, explained that children could benefit from the greater depth of knowledge of these bankers - after all, teachers have only been trained to "a certain level" in financial education. In my opinion (read my recent opinion piece here), anything that brings the educational world and the business world together is beneficial: after all, it is surprisingly easy for those in the financial services sector to overestimate the level of financial knowledge many 'lay people' have, and vice versa.
 (You might also be interested in reading about Pfeg's centres of excellence programme, which trains teachers to teach financial education). 

Education and employment
More encouraging news here. A survey by High Fliers suggests that there could be 2.7% more jobs for new graduates compared to this time last year. However, the report emphasises how crucial work experience is for graduates in finding employment - graduates with no work experience at all would be unlikely to get places on the most prestigious graduate schemes. 

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