Nine times out of ten, the first reaction I get when I tell people I’m a money editor is: ‘You must be really good at managing your own money then.’
I tend to react sheepishly, remembering all the times I’ve not saved money by bringing a packed lunch or that I’ve left cash in low-interest savings accounts.
But there is one decision I made nine years ago that I hope will one day confirm my money managing prowess. When I paid off my final student loan instalment in 2017, I allowed myself one month to enjoy a higher pay packet.
From then onwards I diverted the exact amount I had been paying towards my student loan directly into my pension before I got used to having the extra income.
If things go to plan, that one tweak should leave me tens of thousands of pounds better off in retirement.
One day when I’m in my seventies and taking myself out for a nice lunch or off on a day trip to the seaside, I hope I’ll thank thirty-something-year-old me for writing that email to her pension provider decades earlier.
Caught in a trap: Students who graduated from 2012 onwards won’t have had the opportunity to build up their pensions
But I’ll owe an even greater debt of gratitude to the fact I graduated before the punitively high interest rates and university fees were introduced, which would have delayed by decades the day I started paying more into my pension.
Much has been said recently about the unfairness of the current student loan system: the frightening interest rates, the potential misselling, the financial and emotional burden weighing down graduates throughout the best part of their working lives. And rightly so.
Anyone who tells you not to worry about having tens of thousands of pounds of student debt hanging over you clearly hasn’t felt the relief, elation and renewed sense of possibilities when you’re finally free of it.
However, just as worrying – but commonly overlooked – is what the student debt burden is doing to graduates’ pensions.
I fear there is a ticking time bomb waiting to go off when those who graduated from 2012 onwards – when the most punitive loans were introduced – reach retirement age.
They’ll have been so caught up with paying off their debts throughout most of their working lives that they won’t have had the opportunity to build up their pensions to anywhere near the level they’ll need for the retirement they want.
And it’ll be almost impossible to play catch-up when their debt is finally wiped off.
A pound saved into a pension in your twenties is worth several times more than one saved in your fifties. That’s because the earlier you save the longer you have to benefit from compounding investment returns.
Not only that, but they’ll have missed out on thousands of pounds of free money liberally doled out by the Government to encourage workers to save towards their retirement.
If I get a more comfortable retirement thanks to redeploying my student loan payments into my pension, only a fraction will be thanks to my own self-restraint.
For every £100 I’ve put into my pension, no more than £40 will have come from me. How so? Because my employer matches my contributions and tax relief tops it up too.
Graduates still paying off their loans will have less opportunity to enjoy all that free cash. And, if anything, younger graduates need to put even more away for their retirement than older generations.
For one, they’ll inevitably get a stingier state pension than current retirees receive.
Comments by the pensions minister Torsten Bell last week suggest the triple lock, which has been improving the generosity of the state pension by guaranteeing it rises by at least inflation – may not even survive the next election, let alone decades into the future.
A worrying report last week warned that the state pension age will have to rise substantially – to as high as 75 for children who are in primary school today – in order for it to be sustainable. That’s because the number of pensioners relative to the number of workers paying taxes is rising steadily, the think tank the Centre for Social Justice warned.
Analysis of figures from the Office for National Statistics shows that in 1970 there were four working-age people for every pensioner. By 2025 the ratio has already fallen to 3.5 workers per pensioner.
Under current trends it is expected to fall to about two workers per pensioner in fewer than 90 years. And if the jobs market remains as hollowed out as it currently is, graduates will have to save as much as they can into a pension when they can to make up for the times they may be out of work.
Just over 16 per cent of people aged 16 to 24 cannot find work, according to the latest official figures. The number of graduate roles advertised has fallen by 45 per cent in a year according to jobs website Adzuna.
Last week, the Chancellor Rachel Reeves gave new hope that some relief may be coming for graduates.
At her Mais lecture to the City of London she admitted that ‘Yes, the student loan system is broken’.
However, disappointingly, she seemed to suggest that anyone hoping for reform would have to wait. ‘Yes, we want to fix it. Yes, we want to make improvements. But is it front of the queue? No, it’s not.’
I thought it was one of the advantages of having over half a million civil servants that change doesn’t have to happen one policy at a time.
Telling graduates to get in line is not good enough.
The day the graduate pension time bomb detonates may be decades away. But action to defuse it must start today.
What are your tips for getting the retirement you want? rachel.rickardstraus@mailonsunday.co.uk
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