We know how the generational finance argument goes. Older Brits are clinging on to all the cash, property and pension deals.
Younger Brits – discouraged by student loan hangovers and house prices – are sticking up two fingers to the idea of having to save for anything at all. With retirement a lifetime away, they are blowing any extra cash at the bar.
Except they’re not.
A decent retirement ranks as the second biggest area of concern for young people’s prospects, beaten only by housing, according to data from the Intergenerational Commission.
And it’s paying off. Research from think-tank the Resolution Foundation suggests that those in their twenties and early thirties are on course to enjoying a life after work at a similar level of comfort to the older, golden-goodbye bunch.
They just don’t realise it yet. Just this week, a separate study found that two fifths of younger workers, having heeded the warnings of government and the nasty shocks of their parents, now don’t expect to stop working until they’re well into their seventies, despite only one in 10 wanting to continue working that long.
But it looks like it may not come to that.
Doom-mongers – spurred on by the dramatic drop in lucrative defined benefit deals – have in fact been roundly dismissed by the Resolution Foundation, whose study into the next 40 years of our retiring fortunes is likely to shape Government policy on pension savings and incentives.
“The recent story of retirement living standards has been a successful one as typical incomes have grown rapidly and pensioner poverty has fallen by a third,” it says.
The accepted benchmark for an “adequate” pension is one which provides a retirement income worth two thirds of someone’s pre-retirement earnings. Pensioners currently receive an average of 54 per cent, for example.
Setting the ground for an adequate retirement income is a tall order. Most financial institutions and advisers suggest that achieving this kind of pension relies on monthly savings worth 12 per cent of an employee’s salary the very least, starting from their early thirties.
Now though, a major uplift in private pension saving via auto-enrolment, plus an increase in the number of women becoming fully entitled to a higher state pension means millennials are on course to enjoy the same level of retirement income as those already living in a post-work world.
But don’t relax
It’s all looking promising for now. But the tiniest shift in pay growth rates could have a huge impact on retirement incomes, the report warns.
And the future success of the workplace pension depends on us sticking with it when minimum employee contributions increase to 5 per cent from April 2019.
“The big risk is that faced with anaemic pay rises, people may choose to stop saving into a pension, rather than face higher contributions,” says David Finch, senior economic analyst at the Resolution Foundation. “This would provide a short-term income boost, but could prove disastrous for their incomes later in life.”
In fact, with these increases to minimum contributions, the take-home pay of a typical employee is set to rise by £1,700 over the next four years were they to stop contributing – twice as much as the £850 they would receive if they made the minimum contributions.
“Policy-makers and employers must ensure that auto-enrolment continues to be popular during a critical few years as it’s rolled out and then ramped up across the country,” Finch warns.
“The good news is auto-enrolment means there’s potential for future generations to experience similar outcomes experienced by people retiring today, which benefits younger millennials the most,” says Kate Smith, head of pensions at Aegon. “This group have got into the habit of saving early and expect far less support from the Government in retirement, so are more motivated to save for themselves.
This puts them in a stronger financial position, with a longer exposure to stock market growth. The challenge is to get more people into the saving habit sooner, ideally as soon as they start working.
“Those in their forties, are the exception. As well as losing the pension saving habit, they have tended to miss out on defined-benefit pensions and are likely to build up smaller defined-contribution pensions becoming the lost generation.
However, it’s never too late to start saving, and as people are working longer they shouldn’t give up. This group has the potential to benefit from valuable employer’s pension contributions for another 20 years or more, giving them the opportunity to build up a healthy pension pot.”
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