BLOG: Graduate to a balanced financial future

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04/12/2014

The growing level of graduate debt may result in younger savers postponing retirement saving until later in their careers, but there are ways to tackle both at the same time, says Dale Critchley, Policy Manager at Friends Life.

Student loans and retirement income are at two very different ends of the financial timescale, but the increase in tuition fees, and resultant increase in timescales for repaying that debt could have a far greater impact on long term saving than many people realise.

A recent report by the Higher Education Commission raised concern about the growing level of graduate debt, which was reported to be £46bn in 2013. According to the Institute for Fiscal Studies, a worrying 73 per cent of graduates will not ever be able to repay their debt in full. When coupled with the fact that student loans may impact a graduate’s ability to secure a mortgage – let alone save enough for a deposit on a first home, it’s clear that aiming to put student finances in the past is an understandable financial priority for many. With a clear and justifiable focus of repaying debts and saving for short to medium term goals – property deposits, a wedding, a car – there is a risk that graduates’ ability to start saving for a pension will be classed as a lower priority, for consideration at a later date.

Already, there is a pension shortfall. Friends Life’s own research has shown that people have a very different view of the income they think they will need to have a comfortable retirement, and the income they expect to get. Currently, the average total amount of retirement saving is not sufficient once living and housing costs have been factored in, with people facing a financial shortfall of £97 a week. Most savers expect to need £409 a week in retirement, when their actual income from their savings will be, on average, £312 a week.

The obvious solution is to save more, from an earlier age, but with a contrast between saving for an event 50 or more years away versus achieving the holy grail of home ownership it would be unreasonable, and unrealistic, of the pension industry to expect graduates to select retirement saving over other goals. What’s more, repaying student debt can aid attractiveness to mortgage lenders making that a double win.

But addressing both short and longer term financial priorities at the same time is achievable, and retirement should not be pushed under the carpet simply because it may feel like it is several decades in the future or because the amounts that new graduates can afford to save seem small and better directed elsewhere.

Taking advantage of auto enrolment is one way to gain control. Starting with even low contributions – currently set at 1 per cent for employees in qualifying schemes the amount in the ‘pot’ will start to grow. Coupled with the fact that employers also contribute to most pensions and adding the effect of compound growth, even a small sum starting to build up will make a difference in the long term.

Contributions can be as small, or as large, as people want, dependent on their salary. Many employers will match, or sometimes more than match the contributions employees make personally, so financially it makes sense. It is equally important that employers make their staff aware of their options, and support them in saving for retirement in a way that fits in with their own resources and lifestyle – something that’s happening more as a result of auto-enrolment.

It’s always going to be an easier ‘sell’ to a graduate to save for a physical asset achievable in the short term, but by making it clear that long term financial goals are important too. By making smart choices – like joining a company pension scheme and maximising the fact that employers will help them save, graduates can ensure they are working towards a financially stable future , whatever the level of university debt they have. If all else fails, they should think of it as a student loan in reverse: rather than party first, pay later, a pension is about paying now to enjoy later – no repayment required.

Dale Critchley is policy manager at Friends Life.

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