Young People are Investing in Property - Not Pensions

Young people are turning their backs on traditional pensions as they plough their earnings into owning property, which they regard as their pension investment. Is that a good thing or not? This article provides some thoughts on the matter.

People of the younger generation are not investing enough in pensions to ensure that they have sufficient income to see them through old age, according to a report from the International Longevity Centre. The think tank's recent study highlighted the fact that the proportion of 25 to 34-year-olds putting funds into a pension dropped from 26 per cent in 1995 to only 13 per cent in 2005.

During the same period, the average property value owned by the age group rose from £65,000 to £167,000, although their average mortgage debt also rose by almost 50 per cent from £50,000 to £94,000. As well as paying for more expensive mortgages, the same age group has seen their average household debt reach £4,600, up from £2,400 ten years earlier. The combination of rising mortgage payments and day-to-day living expenses has led to young people having very little left to invest - either as savings or pension contributions.

The ILC think-tank highlights the fact that property owners currently aged 55+ have seen no cash income increase in the last ten years. This is despite the increasing price of their property, making them asset-rich but cash-poor. Senior researcher for the International Longevity Centre, James Lloyd, comments, 'Even though the property wealth of older households more than doubled in value during the ten years after 1995, this has not resulted in an improved standard of living for older people in retirement.

'Now a new generation are seeking their retirement saving skewed towards property assets, with bigger mortgages and falling contributions to private personal pensions. But the young risk being let down badly if they think that buying a property is the best way to save for retirement.' Lloyd's warning stems from the fact that not only can property fall in value, but that the only way to enjoy the cash value of the property is to sell it.

The overall loss of confidence in the pensions market has followed widely reported 'gaps' in the funds being invested against the expected payouts, but even though many analysts are now debunking this myth, young people have firmly turned their backs on pensions. They have seen property values rise so rapidly over the last ten years that they are turning to 'buy-to-let' properties as their 'pension' investment.

Indeed, even mainstream lenders who traditionally provided UK mortgages only for owner occupation are now aggressively marketing buy-to-let products. In fact, if one were to compare mortgages that are designed for owner occupancy against those for buy-to-let, there is now hardly any price differential, whereas in the past the latter always attracted a premium, due to the risk.

With the recent lending crisis all that could be ending. Although cheap mortgages have been relatively easy to obtain over the last decade, five interest rate rises in one year combined with recent worries over the sub-prime market have put a stop to that. Lenders are now tightening their criteria, and mortgages have become more expensive. That will only squeeze young people's finances even more, so the prospect for saving for pensions seems even bleaker than ever.