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For most young people, pensions are the last thing on their minds. Your 60s and 70s seem very far away and, typically, the most pressing financial priority (if there is one) is saving for a house deposit. It may also be that young people have retired parents who live very comfortably, with a house fully paid-off, and so assume that such a future will naturally happen for them as well. Yet this future is not guaranteed, and nor is it necessarily likely – without careful planning.
Below, we explain why young people cannot assume that a comfortable retirement automatically awaits them. Rather, this needs to be planned for – ideally far in advance, and using tax-efficient vehicles such as a pension. We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
The “pension crisis”
There is evidence to suggest that more young people (e.g. 20 to 35-year-olds) face “pensioner poverty” compared to their parents’ generation. Around 17% of Generation Z are opting out of their pension contributions completely, with 28% instead saving for a “dream holiday” and a third choosing to focus on saving for a house deposit. Whilst this is understandable (houses are more expensive, relative to wages, today), young people who neglect saving into a pension risk needing to “play catch up” when they are older – when their money has less time to grow.
Young people also need to consider what the State Pension might look like when they retire in, say, 50 years’ time. In 2021-22, the full new State Pension grants an individual £179.60 per week; or, £9,339.20. This requires at least 35 “qualifying years” on your National Insurance record. The State Pension also, historically, has risen each financial year under the “triple lock” system. However, this has recently been suspended by the Government for one year following the impact of COVID-19 on the economy.
This goes against a Conservative manifesto pledge and makes the future of the State Pension more uncertain. Could it be “means tested” by the time today’s young people retire? Could the State Pension age (the age from which you can start receiving the income) be pushed back even more than the planned rise to 68, between 2044 and 2046? The UK’s population is aging, after all, which is putting more pressure on the State Pension budget. It is not inconceivable that future governments thus require individuals to take more responsibility for their own retirement savings, compared to today.
Young people’s advantage: time
Funding a retirement in the UK is not cheap. If you intend to live on £20,000 per year and expect to live 30 years after finishing work, for instance, then it might look like you need to save at least £600,000 in cash to afford this (assuming no State Pension). However, the calculations are more complex than this. Inflation, for instance, will erode the value of your savings each year – e.g. by 2%, if the Bank of England’s target is consistently met. Moreover, most people do not put retirement savings into cash but rather other investments which produce a return which beats inflation (and cash interest rates) over the long-term, such as bonds and shares.
The good news for young people is that time is their biggest asset when it comes to retirement planning. This is due to compound interest. For instance, imagine you invest £10,000 into your pension. Assuming it grows, on average, by 6% each year (after fees and inflation), it could be worth over £22,000 by year 20. By year 30 it could increase to about £47,000, and by year 40 you might have saved nearly £93,000. By year 50, however, it could be over £174,000. This huge growth occurs because you earn “interest on your interest”, creating a snowball effect that increases more and more over time. So, the earlier a young person starts saving for retirement, the less they likely need to save in total, across their lifetime.
How can young people start saving into a pension, then? A good place to start is to make sure you are adding “qualifying years” to your National Insurance record, each year, whilst working. You can check your record quickly, and for free, on the government’s website. Remember, you need 35 qualifying years in total to get your full State Pension entitlement when you eventually retire. Depending on your age and circumstances, you may – or may not – need to “top up” previous, “incomplete” years on your record. A financial adviser can help you with this.
Another good idea is to make sure you are opted into your workplace pension scheme, if you are employed. Remember, your employer is required to contribute at least 3% of your salary; which amounts to “free money” for your pension. You may wish to also examine how much you are contributing, and whether this needs increasing. At a minimum, in 2021-22 you must put in 5% but it could be wise to contribute more. It is also worth looking at the specifics of your workplace pension scheme. Quite often, the fees are too expensive and the range of choices (for investments) is limited, so it could be worth opening a personal pension to increase your “real returns” (after fees) and align your funds more with your strategy.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938