In this blog, I go through a conversation I had with my young, primary-age kids about pensions over lunch. Fortunately, it didn’t send them to sleep as I like to save those stories for bedtime! Why talk to kids about pensions now? Before I go through ‘how’ I talked to my kids about pensions, I want to say ‘why’ I did talked to them about this when they were still relatively young. In short, a company pension is likely to be the best financial deal my kids will ever be offered and I want to make sure they don’t underestimate this deal like many adults today still sadly do! It pains me when I hear of adults not appreciating the benefits of pensions. For many years I have been advising some of the largest pension schemes from all over the world. Many of these pension schemes offer a “matching” strategy. This means that if you (the employee) contribute to the pension scheme each month then the company (the employer) will contribute the same amount each month (i.e. match your contributions) into your pension pot up to a certain limit. The problem is that so many people are not taking advantage of this great deal and that’s going to have a negative impact on their financial wellbeing in the future. The deal is essentially “You pay some money today and you’ll get double that money plus many years of tax-free investment returns on the combined amount in the future”. To me that seems like an awesome deal and that doesn’t even mention that the money you pay is from your gross salary which means there is at least another 20% to 50% increase in value on this deal. This deal using simplified numbers: If an employer pays you £10 then you have to give some of that to the tax-man which means you might have, say, £7 to spend now. Alternatively, if you ask your employer to put that £10 in the company pension scheme then you get the full £10 (i.e. none to the taxman) plus your employer gives you another £10 (as they match). So instead of £7 to spend now, you have £20 in your pension pot (nearly 3 times more money instantly). The pension money is then invested tax-free. Assuming this doubles every 9 years and you work for 45 years, that’s £640 at retirement. So the deal is £640 at retirement (admittedly possibly with some income tax payable) or £7 in your pocket now. The issue is that a lot of people value money today as worth so much more than any money they receive in the distant future. This is why I talk to my kids about pensions and why I want to help other parents teach their kids about pensions. If kids can learn to see that this is the best financial deal they are ever likely to be offered then hopefully they will look forward to benefiting from it and we’ll have less of a ‘pension crisis’ in the future. Below I go through how I talked to my kids about this topic. Quick recap on previous conversations with my kids about savings For those of you that are new to Blue Tree, here’s a quick bit of background which will be useful for the rest of this blog. For many years I’ve been telling my kids that money is like seeds and when they plant some of those seeds (in our case this means investing their money) those seeds grow like trees, which I call “Blue Trees”. Each month we show them their Blue Tree forest and encourage them to keep growing it by putting at least 10% of all the money they receive into their Blue Tree forest. This is important as I continue this analogy when talking to them about pensions. Below is the story I told my kids about pensions. The Hidden Blue Tree Forest To help my kids visualise and appreciate the value of pensions, I’ve let them know that not only do they have the Blue Tree forest but they will also have a ‘Hidden Blue Tree Forest’ (i.e. their future pension pot). This forest is hidden as you have to go and find it when you become an adult. Most people don’t know about their Hidden Blue Tree Forest as it’s not that easy to find (i.e. most people don’t know what, or how much, pension they have). Those that do go and seek out their hidden Blue Tree forest will see and benefit from the friendly Magical Multiplying Trolls that live there.
If you go and plant one of your seeds in the Hidden Blue Tree Forest then the Magical Multiplying Trolls will use their magic to make the seeds multiply (i.e. pre-tax savings and contribution matching). For every one seed you plant, you magically get up to three seeds (remember the example above where you started with £7 to spend but it would be more like £20 in your pension pot). This means more Blue Trees which can grow and grow for many years. Sounds great, right!?! The Hidden Blue Tree Forest is there to produce seeds (money) so when you are too old to work to earn new seeds yourself you still have plenty of seeds coming in. To make sure the Hidden Blue Tree Forest can grow large enough to produce enough seeds, you are not allowed to touch the Blue Trees that grow there until you are at least 55 years old. Those people that don’t seek out their Hidden Blue Tree Forest and plant seeds there are likely to have to keep working until they are very old as their forest won’t be large enough to produce enough seeds to live off.
The other great benefit of planting your seeds in the Hidden Blue Tree Forest is that there are no Money Birds (Tax) to take any of your seeds that you plant. This means that the Blue Trees can grow larger compared to others planted elsewhere. Parents planting in their kid’s Hidden Blue Tree Forest now It is now possible for parents to open a pension account for their kids and to save up to £2,880 per year. Whilst the Magical Multiplying Trolls won’t turn one seed into three, they will still increase the number of seeds planted (25% increase). For example, if you as a parent put £2,880 in to their pension pot, the Magical Trolls use their power to turn this into £3,600 (in this case the increase from the government topping up the account by 25% from tax relief ). Why not look to open an account for your kids now? You can find more information about Junior Pensions here. Last word There are many people who still don’t appreciate that their pension is the best financial deal they are ever likely to get offered. This is because they find it boring and confusing. Make sure your kids get excited about going to look for their Hidden Blue Tree Forest and taking advantage of the Magical Multiplying Trolls as soon as possible. It can give them a massive advantage in life, especially as they will no doubt live a lot longer than any generation before them so will need a bigger forest than ever! Thanks for reading and make sure you subscribe below (if you haven't already). Will