In Focus: Intergenerational Wealth  

How suitable are financial products for young savers?

  • To understand the different financial needs young people have.
  • To be able to explain various flexible products that might help them save.
  • To be able to start conversations and help educate younger clients.
CPD
Approx.30min

"Claro’s recent research shows that financial literacy scores among 18-24 year olds are 17 per cent below the UK average and 21 per cent of Millenials and Gen Z’s are concerned about their financial situation."

He echoed common concerns that, while it is important to have a retirement account, putting money aside in a pension means clients or potential clients or young people would be unable to access their money for decades.

Therefore, this could mean a young client prioritising a pension could end up sacrificing their short-term financial goals, such as getting on the property ladder or paying off their student debt, which are often more important to young people at this stage of their lives. 

Lifetime Isa

One option to help young people make long-term savings is the Lifetime Isa, launched in April 2017.

This allows adults aged 18 to 39 to save or invest up to £4,000 a year until they are 50 years old, and they will receive a 25 per cent annual bonus from the government on whatever they put away to help fund their first home or their pension pot. 

However, investors cannot take any money out until they reach their 60th birthday; if they do, they will be hit by a 25 per cent penalty on any withdrawals.

Moreover, the inability to withdraw money earlier could put off young people, especially when events such as a pandemic come along, when a more easily accessible emergency fund could provide that extra financial security.

Speaking earlier this month (August) to FTAdviser, Steve Webb, former pensions minister and now partner at Lane Clark & Peacock, said the Lisa should be more flexible and allow people to access parts of their pensions pot without keeping it locked away. 

Annabelle Williams, a personal finance specialist at robo-adviser Nutmeg agrees and adds: "The £450,000 price limit on first homes that can be purchased with the Lisa should be removed and the early withdrawals penalty should be reviewed.’’ 

Balancing longer and short term financial goals

Another option for advising young people is, if they have already achieved the goal of purchasing their first home, to suggest they take on an offset mortgage, instead of saving money in a low-interest account.

Like a conventional mortgage, an offset one allows someone to overpay their monthly bills and save interest in the process but overpayments on an offset remain available to be drawn back down should the need arise, potentially making it more attractive to young people. 

In practice, the mortgage account is linked to a deposit account and before the mortgage interest is calculated, the money in the deposit account is ‘offset’ against the loan. The larger the client's deposit account, the less interest paid. 

While this might work for some young people, commentators have pointed out this is still a debt product - and more product solutions might be needed.