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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. But owning a place of their own remains a dream for many.

| 5 min read

During the COVID-19 pandemic, governments and central banks around the world supported their economies by printing large amounts of money. This led to too much money in the system and, ultimately, inflation. Over time, high inflation leads to counter measures which is why the Bank of England has raised interest rates 14 consecutive times, making mortgages far more expensive than has been seen for decades.

For millennials struggling to get onto the property ladder, this has made the situation yet more challenging. However, with the rise in the cost of mortgages, house prices have fallen in many areas around the country and opportunities can 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 those who have not been able to get onto the property ladder; mainly the age group referred to as millennials. The government recognised this problem and began to address it by introducing new products, supported by government funding, to help younger people afford their first homes.

The Lifetime ISA (LISA), for example, allows those between 18 and 39 to save up to £4,000 a year towards either retirement or a first home. The government adds 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 any interest (cash) or capital gains and dividends (stocks and shares) being tax-free.

Protecting income

Notwithstanding the important desire of getting onto the property ladder, there is a range of other financial priorities and goals the younger generation may need to consider, particularly those with young families. Life insurance and income protection can form the bedrock of a good financial plan, protecting individuals and their families from the financial consequences of death and ill health. If you enjoy good health, these policies can often be very cost effective. They can be really useful to younger people as they have not generally had time to build up enough financial reserves to see them through a period out of work, or look after their families following the loss of the main breadwinner.

Life insurance is designed to pay out either a lump sum or an income (under a family income benefit policy) on the death of the person assured. The aim is to replace the financial loss of an individual or breadwinner.

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 an individual is more likely to fall ill than 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 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 soon as it’s 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.

At the moment, anyone under 75 with relevant UK earnings can receive tax relief when they contribute to a personal pension, up to their annual allowance. Basic rate tax (20%) is automatically added by the pension provider and claimed from HMRC, while higher or additional rate income tax relief can be reclaimed as part of your self-assessment submission.

A young investor should bear in mind that money cannot be withdrawn from a pension until they reach the age of 55. This is set to rise to 57 between 2044 and 2048 and could rise again in line with the State Pension Age.

If you think you might need the funds in the shorter term, a flexible stocks and shares ISA is probably better. Although an ISA isn’t usually as tax-efficient, money can be withdrawn at any time, irrespective of age.

However, as the COVID-19 crises and crises before and after demonstrated, the value of investments 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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The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.

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