Baby boomers greatly favour funding their retirement with their pension, while Gen Zers see property as being their main financial source, according to new research1 published by Standard Life, part of Phoenix Group.
The generational divide
Standard Life’s Retirement Voice study found that two in five (38%) Gen Zers would fund their retirement using their property, with a slightly smaller number (35%) expecting to use their pension instead. A quarter (26%) would use both their pension and property to finance their retirement.
However, older generations who have had longer to formulate their plans and are closer to having to generate an income from their assets prefer to use their pension to pay for retirement. 46% of baby boomers prefer pensions, while only 16% are relying on their property. Just over a third (35%) see a combination of both property and pension as the main way to fund retirement.
Pensions are increasingly more likely to be used as the main retirement asset with older age groups:
Pensions pip property overall
Overall, across all generations, pensions are the most popular choice to fund retirement – 43% compared to 20% who would choose property. A third (35%) would pick both.
Dean Butler, Managing Director for Customer at Standard Life commented: “Where you stand on the question of property versus pensions will be determined in part by your age. Generation Z is more focussed on using a property as their main retirement asset, which may be because saving for a flat or house purchase is more of an immediate priority for this group. However, as Gen Z is the first generation eligible for automatic enrolment from the first day of their working lives, many will be building up retirement savings by default and therefore are perhaps less aware of the potential pension pot they could grow in their lifetime, and how advantageous this can be due to employer contributions and government tax relief. As these sums grow, many will no doubt come to value their pensions more highly.
“There’s no doubt the younger generation faces difficult trade offs between saving for the longer-term and saving for a deposit for a house. Owning your own home in retirement can be a real source of financial security and many will be targeting both property and pensions despite the challenges of doing so.
“Pension provision among older generations is mixed with some benefitting from generous defined benefit pensions, but also many, particular women, excluded from workplace pensions. What’s clear is that as the prospect of having to pay for retirement nears, using pension funds may feel a more realistic and flexible choice, whereas it can be trickier to realise the money you need from your main residence and options like buy to let investing can be a burden.”
Dean Butler outlines the key benefits of pension saving:
• Tax relief – “Tax relief is what makes pension plans one of the most tax efficient ways to save for your retirement, effectively making it cheaper to save into your pension plan. This means basic rate taxpayers will get 20% tax relief from the UK Government on their personal pension payments, so it will only cost you £80 to have £100 invested into your pension plan.
“Most people are entitled to claim tax relief on the pension payments they make based on the highest rate of income tax they pay. This means the benefits are usually even more for higher or additional rate taxpayers.
• Employer contributions – “When you’re in a workplace pension scheme your employer is contributing a minimum of 3% of your qualifying earnings towards your future. Some employers will pay more than the minimum and others will pay more into your pot if you do – known as matching.
• Compounding – “Saving into a pension allows you to benefit from compound interest, and this is hugely advantageous. It means that when you leave money invested, you can potentially achieve growth not just on the original sum but on the growth as well. The benefits of this can be especially powerful if you’re still a while away from retirement age.
• Tax free lump sum on retirement – “Once you reach your 55th birthday (rising to 57 in April 2028), you can take your pension at any point, and in several ways including purchasing an annuity to get a guaranteed income for life, or using drawdown to choose how much you want to take and when. Whichever option you choose, you'll be able to take 25% of your pension pot as a tax-free lump sum.”
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