Savings such as ISAs, Self-Invested Pensions (SIPPs) and workplace pensions have been thrusted to the forefront of saving options for most people. With most adults in work, the most obvious solution to saving for the future is to contribute into a workplace pension. However, the eligibility criteria for auto-enrolment prevents some people some being automatically enrolled in their workplace pension. However, some employees still have the option to opt-out if they wish, but they may not be aware of this due to a lack of education regarding pensions. Thus, this amongst other issues, poses the questions as to where the responsibility lies when educating the children and young adults on the importance of saving, especially into a pension pot.
According to a recent study, three quarters of parents over the age of 55 think that children should be taught more about finance in schools, with pensions selected as the second most important after budgeting. Furthermore, 92% of school leavers believe they would be in a better financial position if they had been taught about finances in school. These statistics highlight the need to educate the young, and the lack of education currently in schools. This would suggest that the issue needs to be urgently addressed, with financial literacy being incorporated into the school curriculum and teachers provided with the tools and resources required to effectively provide the education. It is evident that the current government and Secretary of State for Education need to address this issue. I believe that weekly lessons on financial literacy should be incorporated into the curriculum. With a strong financial education behind them, when young adults enter the workplace they will have an understanding on the concept of saving.
On the contrary, it could be argued that parents also have a great deal of responsibility to educate their children on the need to save from an early age. This could be viewed as a contentious issue with many parents lacking understanding themselves and/or not having the financial backing to do so.
Setting up a Junior SIPP, for example, for your child allows the rewards of long-term approach to investing to benefit them: compounding. For the 2021/22 tax year, the Junior SIPP has an Annual Allowance of £3,600. According to Aviva, based upon the assumption that a parent contributes £300 per month from birth until the age of 18, £64,800 would be invested. When factoring in an investment return of 4.5%, the fund could be boosted to £91,800. If this is held for a further 42 years with the same investment return, the figure would grow to £425,000. Clearly this is an idyllic situation, with most parents not having the financial backing to set this up, but it highlights the advantage of compounding from an extremely young age. However, with the average cost of raising a child to 21 being a quarter of a million pounds, this is an unlikely situation.
The idea of saving from a young age is one of privilege, with many not beginning until adulthood. However, I believe that the government, schools and parents should all play their part in securing the financial future for young children. It is clear not enough is done in schools, and the government need to incorporate this into the curriculum. Workshops from companies that specialise in pensions and savings, would be an interactive way for children to learn and could be incorporated into a school day. Teaching children from a young age about financial literacy will give them the tools and understanding to make informed decisions, thus reducing reliance on the state pension. Parents could also help their children by contributing to pensions for them, reminding them of the importance of savings and encouraging them to do so. The example I used above is clearly a privilege that many don’t have, but even a small amount could go a long way.
What is clear is that parents, schools and government all need to be more proactive to help the young to secure their financial future. Financial education must be addressed, and the importance should be greatly stressed.
Nicholas Whippey, Associate Consultant, at Quantum Advisory
