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 £25,000 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.

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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 15-29 August 2023 – CP/ = 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 (e6,240 to e50,270), Historical years (actual LEL and UEL), Future years (increased annually by CPI assumption) – Income based on current Legal & General annuity.

[2J 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