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Mind the retirement gap

Crisis looming over today’s youth

Today’s twenty-somethings are on the precipice of a retirement crisis. According to new research, if they don’t adjust their savings habits, they could face an income shortfall of over £25k annually during their golden years [1]. This warning applies to young adults in the UK, aged 22 to 32, who are currently not saving enough for their retirement. The findings reveal that a significant proportion of this demographic could be staring down the barrel of a retirement savings gap.

Surprisingly, nearly one in five young people with a workplace pension (18%) need to know more about their monthly contributions. On a more optimistic note, by increasing their savings by just £30 each month, these 22 to 32-year-olds could boost their eventual pension pot by £100,000. However, if they continue their current savings pattern, they’ll likely face a substantial income shortfall of more than £25k annually during retirement, as per the new analysis.

This leaves a gaping shortfall
This group, comprising Zoomers and young Millennials, is projected to amass an average of £800,899 (equivalent to £242,822 in today’s money) in their retirement fund by the time they reach state pension age, assuming current savings rates persist. This translates into an annual retirement income of around £52,699.

While this might sound substantial now, fast forward to the 2060s, and it will be equivalent to just £15,978. This leaves a gaping shortfall of £26,350 a year, which retirees will need to supplement from other sources of income.

Success and shortcomings of Auto-Enrolment
Auto-enrolment has been a game-changer in getting young people to save for retirement. The 22 to 32-year-old cohort marks the first decade of workers reaping the full benefits of auto-enrolment. In this scheme, employees are automatically enrolled into a pension plan, with employees and employers contributing monthly.

However, while the scheme has successfully kick-started early savings habits, there’s a growing consensus that minimum contributions must be increased to ensure adequate retirement funds. Currently, the minimum auto-enrolment contribution to an employee’s pension savings is 8% of qualifying earnings, with employers paying at least 3% and employees paying 5%. However, the Living Pension[2] savings target estimates that 12% of a worker’s annual salary should be put aside to meet people’s retirement needs adequately.

Boosting pension awareness among youth
Young people’s awareness about their workplace pensions could be much higher. The research shows that 18% of young people with a workplace pension are in the dark about their monthly contributions, and a third (34%) have never checked how much they pay.

Moreover, 37% confess they need help understanding how their pension works. This lack of engagement is largely due to other priorities, such as buying a home, which takes precedence over retirement planning for over two-fifths (43%) of young people.

Harnessing the power of compound interest
The study revealed that young people miss crucial opportunities to boost their retirement savings. An extra £30 put away each month from the age of 27 could add £100,000 to their retirement pot by the time they reach state pension age.

However, three out of five 22-32-year-olds need to become more familiar with the concept of ‘compound interest’, which allows savers to earn interest on their previous years’ interest, leading to substantial growth over time.

The urgent need for action
While it can be challenging for young workers to set aside more money for retirement, especially when incomes are stretched thin, it’s essential to consider the long-term implications. Auto-enrolment has been instrumental in encouraging more people to start saving, but the retirement shortfall remains a looming concern.
More young people must understand their workplace pension and the power of compound interest. Minor adjustments now could significantly improve your quality of life in retirement.

Source data:
[1] Analysis based on the following research and assumptions: Opinium Research conducted 2,000 online interviews of people aged 22-32 between the 15th and 29th August 2023 – CPI = 3% – Salary premium = 1% – Salary increase = 4% – Median male salary at age 27 = 35,000 – Median female salary at age 27 = 25,000 – Start saving into a workplace pension at age 22, retiring at age 68 – Investment return on pension pot, assuming broad 60/40 asset split, (6.9% p.a.) – Qualifying earnings – Currently (£6,240 to £50,270), Historical years (actual LEL and UEL), Future years (increased annually by CPI assumption) – Income based on current Legal & General annuity.
[2] Living Pension recommends 12% of a full-time salary, calculated by the Living Wage Foundation.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.