This article was first published on 13th April, 2018

There are many lessons we can pass on to our kids but this is one of the most important. And, it does need to be taught. We do need to take time to show by our actions and our words why saving is important.

It needs to be taught because it is not natural to defer gratification for later in life. We live 99% of our lives now (or recalling past adventures) not in the future. We want to spend what we have NOW! We don’t have time machines yet that will let us see our future selves. We might imagine sipping a drink by our pool in Barbados but the reality is likely to be very different if we don’t save.

From 6th April, employees who have been auto-enrolled into their company’s workplace pension scheme will see their pension savings increase and their net pay decline. Some will consider opting out of the increase.

Don’t let your kids or young friends do this!

Here are the maths (as explained to my daughter).

Assume a salary of £20,000 per annum. If you don’t save into a pension fund you would pay Income Tax of approximately £1,700. For every 1% of your salary that you pay into a pension fund you save £40 in tax. The new rate of pension saving is 3% so you will save £120 in tax. Furthermore, your employer’s pension contribution is also increasing from 6th April – from 1% of salary to 2%. This will add another £400 to your pension savings. The total “gift” from the government and your employer is £520.

Putting 3% into your pension fund will reduce your take-home pay by just £40 per month but will increase your pension savings by £1,000 in just one year made up of:

£480 from you
£520 from the government and your employer
Pass this test and get an A* in Finance!

The introduction of auto-enrollment was a good move by the government and has got an additional 9 million – mainly younger people – saving. It has done less well in getting them interested and involved in pension saving and what they can do with the money. More on this in next week’s bulletin.