Why You Should Give a Shit About Pensions

The list of things we all have to worry about is long. And pensions are far, far down at the bottom - right behind getting a stable job, dealing with £50k worth of student debt and finding somewhere to live that isn't a mould-filled box.

But while we're dealing with immediate concerns, politicians and employers are busy making major changes to the pension system that that will leave younger generations massively worse off - both now and in the future.

"Young people naturally don't think much about retirement or pensions, and politicians have ruthlessly exploited this fact to undermine the position of the younger generation," says Angus Hanton, co-founder of the Intergenerational Foundation.

The average young person knows about tuition fees tripling and EMA being scrapped. But they might not know how pension changes affect their take home pay, right now. Or that three quarters of 20-year-olds will be £19,000 poorer over the course of their retirement. Or that younger people may well end up with less money as pensioners than their parents.

If, like most you don't have a clue what's happening to pensions, here's a simple breakdown of how it works - and how you're losing out.

As long as you're paying national insurance, you'll get a state pension. But don't get too excited.

"If people rely just on the state pension, they'll live in poverty," says Guy Anker, managing editor of Money Saving Expert.

In today's terms it's worth £8,000 a year - and its future doesn't look great. This is mostly because people are living longer, there's not enough cash to go around and the government has made things worse by promising old people guaranteed rises in the state pension, which experts say isn't unsustainable.

In April there was also a big shake-up of the state pensions system which has left young people in a worse position. Under the old system, people are able to claim money from two state pension pots - the second one (known as Serps) is based on National Insurance contributions. Younger workers have now been told that they won't get a second state pension, even though they will still be paying full NI contributions. It's thought that three quarters of 20-somethings will lose a notional £19,000 over the course of their retirement because of the changes.

Obviously, this figure is only an estimate, but it's unlikely the state pension will get better, says Anker. "If you're a 30-year-old right now, you're talking 38 or so years minimum until you get to claim a pension. Who knows where we'll be in 38 years? There might not be a state pension. We just don't know."

And, who knows when you'll actually be able to claim your state pension either? The state pension age is already set to rise to 68 by 2044-46. There's a government review going on at the moment that will probably accelerate this further.

Basically, don't expect much from your state pension, and don't expect to claim it until you're really really old.

Alongside your state pension, you'll probably have a pension through your workplace. The government recently changed the rules on this so that if you're aged 22+ and earn more than £10,000 you'll be automatically entered into a workplace pension. You can opt out if you want to, but most experts say it's the best way to save - your employer will also contribute and you'll get tax relief.

This sounds all right, but it's nowhere near as generous as the pensions enjoyed by older generations. Research by the Intergenerational Foundation found that companies spend 20 times more on the pensions of older workers than younger workers - basically because baby boomers are far more likely to be on final salary pensions. These types of pensions promise a fixed annual income throughout retirement (a figure that's based on your final salary and the number of years you've has worked at a company). But because they're expensive for employers to run, most young people won't stand a chance of getting one.

Instead, young people are being enrolled on private pensions where there's no guarantee of the amount they'll receive once they retire. You put money in and hope for the best. If the investments underperform or you don't have enough money to contribute - perhaps because you're trying to pay off debt or save for a deposit on a house - that's your problem. And, most experts say the minimum amount that people should contribute - which in a few years' time will rise to eight percent, with three percent coming from your employer - is not enough to ensure a decent standard of living in retirement.

But this isn't the only reason young people are getting ripped off. Some argue that the final salary schemes enjoyed by baby boomers now entering retirement means companies are less likely to raise younger workers' pay or hire more young employees. The money has to come from somewhere - and it's unlikely to be taken away from shareholders or big bosses. Paul Johnson, Director of the Institute of Fiscal Studies, has called them "a burden on the young who can't hope to enjoy them."

If you're self-employed - and a growing number of people are - and you also happen to be young, then you're in an even worse position. "You're not eligible for [a workplace pension with] employer pension contributions, so there's a certain amount of 'you're on your own'," says Tim Pike, head of modelling at the Pensions Policy Institute. You need to shop around for a private pension and start saving.

A lot of freelancers will go in and out of jobs at various point, which means there is some back-up - but, equally, having lots of small pots is nowhere near as effective as having one main pension. This is a problem for all young people, who are far less likely to have a job for life.

The government has designed something called a Lifetime ISA available, which allows young people to save money either for a pension or to take money out earlier if they want to buy a house. This was designed with self-employed people in mind, who aren't benefiting from employer contributions. But - although it might sound tempting for people who are trying to save for a deposit - unlike with pensions, savings here are taxed at source.

Hanton is sceptical and argues that Lifetime ISAs don't come near to dealing with the real problem facing young people. "Unless we fix the housing and cost of living crisis for the young, we cannot expect them to save for their own retirement let alone to pay pay for older generations' pensions."

Most experts agree that the gap between generations is far too wide. Young people are suffering on all fronts, says Tom McPhail, Head of Pensions Research at Hargreaves Lansdown, an investment service. "Everything is against young people. The state pension age has gone up, the tax breaks are being progressively cut back, they're coming into the workforce with student debt in a lot of cases, the contribution rates that employers pay into work-based pensions have declined."

But while older people, who care a lot about how they'll be spending the next 30 years, turn out in their hoards to votes, pensions didn't make it into the top issues important to first-time voters in the last election.

There is a sense among young people that it'll work itself out in the end and everything will be ok, suggests Hanton.

But unless you're in line to inherit vast sums of money or property, this isn't the case. "Young people tend not to be interested in the pension bill, they assume 'their turn will come'," he says. "The sad truth is that their time might not come if they cannot afford to save towards their own pensions."

@rebeccarat

Read more from The VICE Guide to Finance 2016 here