By Angela Seymour Jackson – Managing Director, Workplace Solutions, Aegon UK
This would require a savings pot of over £1.5million, a sum above the pension lifetime allowance (£1.25m), and well above what the lifetime allowance is set to come down to on 6 April 2016 (£1m).To achieve a pot of this size, a person aged 20 who is aiming to retire at age 68, would need to save £500 a month, assuming a 5% net return on their investments.
When we consider target retirement age, the demands become even greater on this age group, with our research showing 16 to 24 year olds are actually hoping to retire at 63. It may come as quite a shock to them, but in order to realise this ambition, they would have to put away even more, saving as much as £800 a month*. In reality, three fifths of this age group don’t contribute any money to their pension pot at all.
The danger for young savers, aside from their unrealistic pension goals, is the shift from DB to DC schemes. No longer are employers handing out these gold plated pensions, instead, it’s on the individual to ensure they’re putting enough aside for their future.
Another danger is an absence of any form of saving. Past research has also shown that the people most likely to opt out of a workplace pension scheme are the younger generation, who feel they can’t afford to save due to other financial commitments, such as student loans or saving for a deposit to buy a home.* These are the savers who can make the most significant difference to future capital, and it is essential that Government, providers and employers engage them sufficiently to ensure they make necessary contributions in order for them to be ready for the retirement they want.
These unrealistic ambitions may however be a temporary effect of youthful exuberance and naivety, with the research also revealing retirement income ambitions tail off as people get older. In the next age bracket, 25 to 34 year olds aim for a retirement income of £45,000 and those closest to retirement, 55 to 64 year olds aim for £30,000. This suggests a vast generational gap in retirement ambitions, but at least it shows an element of pragmatism.
Despite this, all is not lost, there is light at the end of the tunnel for young savers. The effect of compounding means millennials have a huge edge in accumulating wealth for later life, and the earlier they start the better. For instance, a 25 year old saving £50 a month with net investment growth of 5% and earnings growth of 2%, could create a pot of around £100,000 by age 65. If however, that individual started at 18, that pot would reach over £150,000. This means additional funds of around £50,000 in exchange for those additional contributions made by starting to save seven years earlier.*
This age demographic will need to get wise to their pension contributions, and we all have a role to play raising awareness. At the moment, those aged 16 to 24 are by far the least engaged. Seven in ten have never done anything to review or affect plans for retirement, while over half don’t know whether they are eligible to be enrolled into a company pension, a vital starting point for those looking to grow their pension pot from a young age.
Overall, the findings don’t paint a pretty picture for the UK’s younger savers. Unrealistic expectations in retirement income and retirement age, combined with their low engagement levels, means that this age bracket are set to fall well short of their retirement targets. We want people to take a hands on approach from a younger age, to get them saving now so they reap the benefits of compounding. Digital solutions that provide platforms for engagement that complement their lifestyles is a good start, giving people access to view and manage their retirement savings online or on their mobile. Initiatives like this will go a long way to helping align this age groups’ retirement ambitions with their savings contributions.
References
* Calculated by Aegon – assumptions:
• Net investment growth: 5% a year
• Earnings growth: 2% a year
• Contributions increase in line with earnings
• Single life inflation-linked pension bought at retirement, with a five year guarantee (using current rates from the Money Advice Service)
* Pensions calculator 04/08/2015
*DWP - Automatic enrolment: experiences of workers who have opted out - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/288530/rrep862.pdf
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