Mind the pensions gap. Research suggests younger savers may need to pay closer attention to how much they are saving.

May 20, 2024

With increased life expectancy, attitudes towards life after 50 are changing, and many of us in our 50s and 60s are already looking forward to life after work. If you’ve been saving into a pension for many years, you are hopefully confident that your income after retirement will be enough to sustain your aspirations.

However, some recent research suggests that the prospect of a comfortable life in later years is less of a reality for today’s younger generations, who are facing a shortfall in their pension income. A survey of adults aged 22-32[1] conducted by Opinium Research late in 2023 showed that a proportion of this age group are not currently saving enough for their retirement, with some facing an income shortfall of more than £25,000 annually during retirement.

Why are young people facing a pension income gap?

Let’s look at some of the reasons for this.

The first, and simplest answer is that people aren’t saving enough into their pensions each month.

Auto-enrolment in workplace pensions is, somewhat ironically, slightly to blame. The 22 to 32-year-old cohort is the first decade of workers to reap the full benefits of this successful scheme to automatically enrol workers into a pension plan, where they and their employers contribute monthly.

However, while it has promoted early savings habits, the numbers aren’t quite adding up. Currently, the minimum auto-enrolment contribution to an employee’s pension savings is 8% (with employers paying at least 3%). However, figures published by the Living Wage Foundation[2] recommend that at least 12% of an annual salary should be put aside to meet most people’s retirement needs.

Lack of awareness about pensions 

The Opinium survey showed that 18% of young adults with a workplace pension don’t know how much they are contributing monthly, and 34% have never checked how much they pay. 37% also said they needed help to understand how their pension works.

It’s understandable. 43% of people said that buying a home was more of a priority for them than retirement planning, and with incomes stretched thin by the current cost of living, saving more for the future inevitably gets pushed further down the list.

How can younger people bridge the retirement gap?

The good news is that, partly thanks to the power of compound interest, a little more now could go a long way later. For many people in this age group, saving just an additional £30 per month could boost the total in their pension pot by £100,000, helping to increase their annual retirement income.

Everyone’s circumstances are different, though. If you’re concerned about your pension savings, or simply want to review where you are (at any age), and need help to understand the numbers, the best thing to do is talk to an independent financial adviser (IFA).

An experienced IFA will help you to understand your specific pension arrangement(s) and, if you need help to familiarise yourself with the facts, will explain to you how pensions work.

They’ll also look together with you at your options. If you need help to create a financial plan, and identify opportunities for saving, they can work through that with you.

At Talis IFA, we take a ‘get rich slow’ approach, and encourage affordable savings and investment approaches. We understand that life comes first, so we’ll look with you at where you are now, where you want to be, help you to set out your roadmap for getting there, and stay with you along the journey. (We can also help you sort out your mortgage, if that’s your current priority.)

At Talis IFA we pride ourselves on offering plain-speaking advice – helping our clients to navigate the financial world with greater confidence.

To get our help to plan for a more tax-efficient year, find a Talis IFA here.

 

1) Opinium Research conducted 2000 online interviews of people aged 22-32 between 15-29 August 2023. 

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. 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.