Private pensions will not exist by 2050 as young people have no interest in saving money that they can not touch for decades, a leading pension expert has warned.
Michael Johnson, a research fellow at think tank the Centre for Policy Studies, said that private pensions will cease to exist within years because young people see having immediate access to savings as far more important than putting money aside for their retirement.
Rather than saving into pensions, 25 to 34-year-olds should be encouraged to save into ISAs which they can dip into if they need to, said Mr Johnson, who used to run David Cameron’s Economic Competitiveness Policy Group.
His comments come despite Government efforts to boost pensions through its recently-launched auto-enrolment scheme, which obliges companies enroll staff in pensions.
Recent research found that just 12 per cent of people in their 20s and early 30s are paying into a pension, despite the Treasury offering tax relief on retirement savings.
Mr Johnson said: “The word ‘pension’ does not resonate with Generation Y. Immediate access to savings is far more important to them than the 20 per cent bribe that is tax relief.”
He said that young people can see little reward in “tying funds up” for 30 or 40 years when there is a “distant and uncertain” financial return that is constantly being eroded by rising pension costs, such as management fees.
Mr Johnson said: “Pensions will cease to exist before 2050. I don’t say that lightheartedly. They will cease to exist for a variety of reasons but the one at the top of the tree is that if you go and talk to people in their 20s and 30s today the word pension does not resonate with them.”
“It is such a distant concept in terms of [young people’s] ability to afford putting funds aside for a pension that the next cohort of the pension customer base is not going to materialise.”
Mr Johnson said that young people today should only invest in workplace pensions if their employer is making “sizeable” contributions and if they are 40 per cent taxpayers, meaning they get more tax relief. However, he said that if this is not the case then it is “almost certainly not worthwhile” for young people to save into a pension scheme.
Pension saving among young people is extremely low, particularly as many now have student tuition fees to pay off. A recent report also found that people aged between 25 and 34 also have “entirely unrealistic” pension assumptions.
For this £30,000 figure to be reached, a 25-year-old would have to save £400 every month until they reach retirement age, assuming an annual return of 5 per cent. Meanwhile a 35-year-old would have to save £750 a month.
Pensions groups have warned that Britons are “sleepwalking into a pensions crisis”.
Mr Johnson said that young people’s lack of interest in pensions will lead to the industry shriveling.
“In time, demand for pension products will diminish. This will hasten the demise of the tax relief, which will accelerate the contraction in demand,” said Mr Johnson.
Mr Johnson said that pensions should be replaced by ISAs, which would allow young people to save but also give them access to their funds if they need the money.
“The fundamental problem with pension saving is that if you are someone who is 25 today, it is going to be 45 years before you can touch it. That is just insane, particularly when you are struggling with very high housing prices and college debts,” he said.
He said: “The long term objective for youngsters is to aim to be a debt-free homeowner when they reach retirement. Nothing else.”
* Read more on rising pension ages and how retirement income has been hit