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Six ways younger people face an uncertain financial future

Higher housing costs, a more expensive state pension and doubts over their ability to inherit

Last week’s budget may have pledged some relief to younger people faced with the cost of living crisis in the form of rent and energy credits, as well as tax cuts and the extension of the Help to Buy scheme. However, the measures are unlikely to do much to reverse a stronger trend in which this generation face an uncertain financial future.

Recent weeks have seen an overhaul of the state pension to incentivise people to work longer as well as placing a greater financial onus on the younger generations, as well as a recommendation to increase tax on inheritances. Here, we take a look at some of the ways people in their 20s and 30s today are likely to be less financially stable than their parents.

1: Less likely to own their home

A lack of suitable housing, more contract type work, flat incomes and more expensive housing; it’s all conspiring to make buying a home a much more difficult prospect than it was in times past.

According to an ESRI report from this summer, 60 per cent of people aged between 25-34 owned their own home 18 years ago. By 2019 however, this had plunged to just 27 per cent, and experience would suggest that it has fallen even further since.

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Not only that, but the study from the ESRI would suggest that even, as one would expect, more and more people currently in this age group are in a position to buy a home as they get older and their earnings increase, substantially fewer will still be in that position than it once was.

For example, the home ownership rate for those aged 35-44 is currently 58 per cent. Seventy-one per cent of this cohort are ultimately expected to own their own home (note that this is also down on previous generations). When it comes to those aged between 25-34 however, just one in two people are expected to ever buy their own home.

Of course this is just an estimate and may change if, for example, income growth outpaces house price growth for a sustained period, or if housing policy initiatives succeed. However, this decline in home ownership seen in the younger generation is reflected in broader trends.

As the ESRI report notes, home ownership rates are around 10 percentage points lower (approximately 80 per cent) for those currently aged 55-64 and 45-54 compared with current retirees (approximately 90 per cent).

2: Will have higher housing costs due to rent

If this age group aren’t buying their own home, they must be renting. And figures show more people are now renting — and paying considerably more than they might have done in the past.

Back in 1991, fewer than 10 per cent of the population rented, according to CSO figures. Fast forward to 2016 and the private rental sector has expanded to almost 20 per cent of the population, with a further 10 per cent in local authority housing. So almost a third of the population are now renting.

Many of these renters are younger and they are spending a lot of their money on rents. According to Residential Tenancy Board figures, the average rent nationally for a new tenancy in the first quarter of 2022 was €1,460, up by about 46 per cent on the second quarter of 2008. In Dublin, the average new rent was €2,015, up by about 55 per cent on the previous high in 2008.

This has a clear detrimental impact on a household’s finances. No surprise then perhaps that in the ESRI report more than 20 per cent of households aged 25-34 face high housing costs, compared to just 6 per cent aged 55-64 and just 1 in 100 of those aged 65+.

“For all age cohorts, the incidence of high housing costs is notably higher for non-homeowners,” the report says.

3: Likely to be older if they do buy

Where those in this younger generation does manage to buy a home, it’s likely to be later than their predecessors. And this can also have financial consequences.

Central Bank data show that the average age of a first-time buyer last year was 35. Contrast this with the typical age of 29 just 16 years ago, and earlier again before that.

This has a number of major impacts on the financial health of a household. Firstly, the later you buy for the first time, the less time you may have to generate equity and “trade up” to a home that may better suit your family.

Secondly, it will affect how much you can afford to borrow. If you’re 40 for example, it’s unlikely a bank will lend over 30 years to you but repayments on a 25-year loan will be more expensive on a monthly basis (although ultimately “cheaper” due to the lower amount of interest paid). This can have an impact on where and what you can afford to buy. While if you do want to trade up, the time left for another mortgage will again be shorter, and again more expensive to service on a monthly basis.

Thirdly, the later you buy, the older you will be when you finally finish your mortgage. That means you will have fewer financial resources to dedicate to building a retirement fund. Not only that, but some homeowners may find they have to carry a mortgage into retirement.

4: May get a smaller tax-free inheritance

A gift from the bank of mum and dad has become increasingly common to help first-time buyers get on the housing ladder but a recommendation in the recently published Commission on Taxation and Welfare report would reduce the amount children can be gifted without incurring a tax charge.

The report called for a “substantial” reduction in the amount of money parents can leave their children tax free, suggesting the parent to child tax free threshold should come closer to the Group B and Group C thresholds. This would represent a massive decline in allowable tax free income, as these thresholds are just €32,500, and €16,250, respectively.

While Government has since said there is “no appetite” for the changes, the amount children can inherit tax free has proven volatile. Back in 2009 for example, the parent to child threshold was €542,544. After the financial crash it fell to as low as €225,000. While it has risen since, it now stands at €335,000, around 35 per cent down on that 2009 peak. Anything over the €335,000 threshold is liable to tax at 33 per cent.

5: Less money in retirement

Part of the reason why many of those in their twenties and thirties today will face a more challenging retirement in the future is because they may not own their own home. As the ESRI report notes: “Home ownership in retirement provides security in the form of low and stable housing costs, as well as an asset that can be drawn upon as a potential source of income in retirement.”

Without this, retirement looks a lot more fraught. Housing costs are substantially higher for those who rent, rather than own. The ESRI report suggests that under a “low” home ownership rate of 63 per cent, the income poverty rate might be as high as 31 per cent. But when home ownership is at 92 per cent, it falls just 14 per cent.

Those currently aged 65+ are only paying 0.5 per cent of their income on mortgage costs as a group, while the vast majority have paid off their mortgages, and thus have no housing costs in retirement.

6: A longer working life — with lower benefits at the end

Until 2014, you were entitled to receive the state pension at the age of 65. It subsequently moved to the age of 66, wiping out about €12,000 in State benefits in one fell swoop. By the time those in their twenties and thirties retire, even if the benefits are similar to today, they will have paid a far higher price to attain them.

Under sweeping changes announced last month, which are due to be introduced in January 2024, the retirement age of 66 is set to stay but the cost of providing it will increase as a larger portion of the population hits that age with relatively fewer younger people working to pay for it. This means that younger people will inevitably have to cough up more in PRSI to ensure the pension continues to get paid, including when they eventually qualify for it.

The Government has signalled that it will impose “gradual, incremental increases in social insurance rates over time”. The Irish Fiscal Advisory Council however subsequently warned that rather than being “incremental”, “large” increases will likely be needed to keep funding steady.

Younger people will also be offered the option to postpone their retirement altogether, with a “higher” rate of state pension payment available to those who wait until the age of 70 to claim it (of course it’s not necessarily a higher payment, as you will have given up a number of years of the payment, so will have to live longer to benefit).

The new approach means, at current payment rates, a payment of €253 a week for someone who retires at 66, rising to €266 at age 67; €281 at 68; €297 at 69; and €315 at 70, so an extra €3,224 a year for someone who retires at the age of 70.

Younger people also face challenges on the private personal pension front. Unlike todays’ generation of pensioners, many of whom have the advantage of a final salary/defined benefit pension, younger workers will have to depend on themselves more than their employer to provide for their own retirement.