Money Observer’s Prudent Parent on the financial challenges a child born today faces.
My almost two-year old son has a one in four chance of reaching the ripe old age of 100. A frightening statistic, not least because I will be 129 when he reaches three figures. This got me thinking about the financial challenges a child born today has in front of them.
First off, with rising levels of life expectancy, I cannot see the state pension existing in 70-odd years’ time, certainly not in its present form. Moreover, the age at which money can be taken from a workplace pension will surely rise from 55, the threshold in place today. Perhaps those who want to retire earlier will need to pay a tax penalty for the privilege.
There may also be other new personal finance-related taxes to contend with. I would not be surprised if some sort of social care tax is introduced at some point. One in four people in the UK are expected to be over 65 within the next 20 years, and the vast majority have not set enough money aside for care provision in later life. You might think a social care tax is far-fetched – but governments make money where they can. Russia introduced a tax on beards in the 17th century!
Ultimately, what this all boils down to is that my son will have to take greater control of his own personal finances, much more so than previous generations. He has the precious commodity of time on his side, which is why as soon as he starts earning his crust I will be hammering home the importance of saving into a pension and taking full advantage of the top limit of employer contributions being offered.
How much would my son need to set aside? Well, according to Schroders, which did some research last year, a 20-year-old wanting to retire at 68 on about £27,000 per year in today’s money would need to save an average of 11% of earnings per year. There are various caveats and assumptions, including that the 20-year old’s salary starts at £20,000 and wages rise with inflation each year, with pay rises boosting the salary up to £40,000 by age 50. But the underlying point is the wonderful power of compounding when it is harnessed at such a young age.