A generation Y-er’s verdict on the latest developments in the world of young people and personal finance.
On the whole, news this week in the world of young people and finance has been bleak. Deposits for first-time buyers remain stubbornly high, locking many out of the dream of home ownership. Pension schemes are closing at record rates exacerbating feelings of uncertainty, and it is indicative from CityWire analysis that the current model of pension provision, even after recent reforms, is no longer fit for purpose, at least not for younger people.
However, there may be light at the end of the tunnel. At long last, it looks as if the Education Secretary, Michael Gove MP, is set to make a decision on whether to make financial education compulsory for schoolchildren. I just hope there is room on the already jam packed-curriculum...
This week, we are set to find out if the teaching of personal finance will be made compulsory in schools. More than 250 MP and peers back the idea, which has been presented in a 150 page report to Michael Gove.
And this motion has an unlikely supporter. Anthony Browne, the chief executive of The British Bankers' Association (BBA), has written to Gove asserting that “making personal finance education a statutory requirement would provide real benefits for children, society and the future of our economy’.
If successful, teaching of personal finance would become part of the National Curriculum by 2014/15… watch this space…
The question of financial literacy is not just hitting the headlines in the UK. Over in Kenya, the Central Bank has called for the private sector to help deal with the high levels of financial exclusion which is preventing many Kenyans from gaining access to financial products and services.
Pensions headlines were dominated this week by the news that final salary pension schemes are closing down at a record rate. A new report by the National Association ofPension Funds warned that only 13% of new recruits at companies will now get a final salary pension – which pays workers a fixed percentage of their earnings on retirement, is inflation linked, and is guaranteed by the government.
There is also the risk that those who are currently saving into one find it closed down with little warning – it seems that there is little certainty in individual pension schemes.
And what are the implications for young people? First of all, the pension schemes that they may be contributing to are far less generous than final salary schemes. Secondly, they are not necessarily inflation adjusted, and, worst of all, they are at the mercy of the financial “elements”, and future tinkering by the Government. An article by Michelle McGagh in CityWire looked at the behaviour which shapes young people’s decisions about pensions. The main problem she identifies is that the money locked away in a pension fund cannot be accessed until retirement. While this is the most effective way of young people getting favourable returns on their investments, particularly high-yielding, higher risk investments, it can be troublesome if they then find that they need to make an expensive purchase, such as a car or deposit on a property, but do not have access to this capital, because it is locked away in a pension fund. The worry is that they are then forced to borrow at higher rates than they may be receiving from their investments.
PAYMENTS AND TECHNOLOGY
Research by the National Australia Bank (and Quantium) has found that Generation Y-ers inAustralia are less likely to use their credit cards than other age groups. At the supermarket, for example, they are twice as likely to pay by debit card than credit card. NAB also noted that Gen Y-ers were more focused on saving than spending: according to its general manager Michael Shurlin, “we’re seeing stronger growth amongst the younger generations opening both transaction and savings accounts.”
The CSFI’s recent report was also referenced. This found that two thirds of young people with credit card debt paid it off every month, although not, it appears, without help from their parents: 46% still received help from their parents, and of these, 41% received more than £200 per month.
As an aside, there does seem to be very little data about card behavior amongst young people. Perhaps, with the advent of contactless card payments, more research might be done in this area.
EDUCATION AND EMPLOYMENT
Last week, we reported that although the rate of unemployment had fallen for the population as a whole, amongst young people (aged between 16 and 24) it had actually risen. We now have an explanation for this. It seems that the entire net increase in employment isdown to the over 50s – according to the ONS. Moreover, research by Citi bank raised concerns about the impact that a steadily ageing demographic could have on young people’s prospects over the long term.
Anyone who has ever struggled to stay in control of their finances has long known of the negative effect it can have on health. New research has found a clear correlation between debt and depression.
A study by LawrenceBerger, associate professor of social work at the University of Wisconsin-Madison, discovered that every time the amount a person was indebted increased by 10%, depressive symptoms rose by 14%. However, there was good news for younger people here, as the research also found that young people were less concerned by debt – they had more confidence that they would be able to tackle it off over time, or as their circumstances improves, if they moved into a higher payer job, for instance.
Berger also drew a distinction between long-term and short-term debt. Although they were happier about short-term debt, such as payday loans or credit cards, rising levels of long-term debt, including student debt amongst young people, did mean that they were more worried about this type of debt than other age groups.
SAVING AND INVESTMENT
It hardly qualifies as news these days but there are yet more hurdles for young people to clamber over before they can hope to become homeowners.
Analysis by Oxford Economics says that the average first-time buyer will have to put down £60,000 for a mortgage, rising to £110,000 for those in London. And it gets worse. By 2020, it looks as if the average deposit, assuming it is 25% of the total value of the home, will have to be £61,500. The Council of Mortgage Lenders found that 66% of first-time buyers have had to turn to their parents for financial assistance in order to get on the housing ladder.