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Financial Planning for Millennials

Millennials may have been banking on a chance to capitalise on a drop in UK house prices when the world eventually recovers from COVID-19 and may be disappointed now.

Happy tenant resting drinking coffee moving home sitting on the floor in the night

by
Sam Cowan

in Features

18.05.2020

With a collapse in the sales of homes throughout the COVID-19 crisis, you might expect to see a commensurate drop in UK house prices. Yet, so far this has been relatively modest with an expectation of a fall of around 4% this year. Those in the millennial generation may have been banking on a chance to capitalise on any fall when the world eventually recovers and may be disappointed. However, this does not mean other opportunities cannot be found for the younger generation to meet a range of lifestyle needs.

A first home

The term ‘generation rent’ was coined in 2011 to broadly define the demographic (predominately millennials) who have not been able to make their way onto the property ladder. The government recognised this problem and began to address it by introducing new legislative products with accompanied government funding, to help those living in generation rent attain their first home. The Lifetime ISA (LISA), for example, allows savings up to £4,000 a year towards either retirement or a first home for those between the age of 18 and 39. The government will add up to £1,000 per annum (£1 for every £4 saved) as a bonus. The underlying assets held within the LISA can be held in cash or in stocks and shares with subsequent interest and or dividends being tax-free.

Protecting income

Notwithstanding the importance of clambering onto the property ladder, there are a plethora of other financial priorities and goals the younger generation may also need to consider, particularly those with young families. Life insurance and income protection can often form the bedrock of financial planning requirements, protecting them and their families from the financial consequences of death and ill-health. Providing the individual is healthy, these policies can often be very cost-effective and are usually particularly necessary, given many younger people have not had time to build up financial reserves sufficient to see them through a period out of work or see their families through the loss of the main breadwinner.

Life insurance is a financial protection policy designed to pay-out a lump sum (or income under a family income benefit policy) on the death of the sum assured to proportionately replace the loss of an individual or breadwinner from a financial perspective. Income protection, meanwhile, is designed to pay out an income to the policyholder to cover any unpaid wages as a result of not being able to work due to poor health or injury. As morbidity rates are higher than mortality rates, meaning an individual is more likely to fall ill, statistically, than they are to die at a young age, income protection policies tend to be more expensive than life insurance policies, but are equally necessary in most cases.

The future

There is a general order of priority in financial planning that changes depending on age and circumstances, and although a first home and financial protection is often high on the list for the millennials, this does not mean longer term financial planning should be put off. On the contrary, long term savings and pension planning should be considered as early as is affordable to reduce the strain of building a retirement fund in later life. This is a trade-off between the lifestyle you want to live today and how well you want to live in later years. Even a small amount of regular savings, compounded over decades can yield significant sums if invested well. That’s especially the case when a pension is used due to the tax relief available.

Currently, anyone under 75 with relevant UK earnings can receive tax relief when they make a contribution within the annual allowance to a personal pension. 20% is automatically added by HMRC and any further higher or additional rate income tax relief can be reclaimed on top.

A young investor should bear in mind that sums invested into a pension cannot be withdrawn until the age of 55 (and this is set to rise), so where funds may be required in the shorter term an ISA will likely be preferable. Although an ISA isn’t usually as tax-efficient, money can be withdrawn at any time, irrespective of age.

As the COVID crises has shown in recent weeks, the markets can be volatile and any pension or other investment should be made for the longer term (five year plus) in the context of an individual’s goals, needs, affordability and risk tolerance. 

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