Rent, subscriptions, travel costs, filling the fridge, socialising – for younger workers in their 20s and 30s there are so many competing priorities fighting for a slice of your monthly wages, it can feel as though there’s no wiggle room to set any money aside for the future.
Compound that with high inflation and the difficulties of purchasing your first home, it’s perhaps no wonder some younger people are focusing on the short-term rather than planning for their retirement in three- or four-decades’ time.
The trouble is, with Defined Benefit Pensions* now the preserve of only public sector workers, it is now more crucial than ever for people to take control of their pensions – and starting as early as possible will pay dividends when the time finally comes for you to hang up your office pass.
This Pension Awareness Week, we explore the issues around pension saving by 20 and 30-somethings in the UK:
What sort of problems might young people face in the future if they don’t contribute sufficiently to their pensions now?
- Having to rely on the State Pension
We’ve no idea what the State Pension might look like in 40 to 50 years’ time, for those currently in their 20s and 30s. Will the State Pension age be increased further, for example? If so, that means anyone relying on it will have to work longer, perhaps far longer than you currently hope.
Will the State Pension be worth less, in real terms, than it is now? The UK State Pension is already one of the lowest in the developed world. Is that likely to change significantly over the course of the next 40-50 years? Who knows, but with the UK Government’s finances already stretched and heavily reliant on borrowing to balance the books, the scope for making radical (positive) changes to the UK State Pension would appear to be pretty limited.
- Needing to make up for lost time
Those who are able to put away even small amounts in their 20s and 30s will benefit from a longer investment timescale and compound growth. If you don’t start until your 40s or even 50s, you’ll have to contribute a significantly higher percentage of your available income to get to the same endpoint.
The next problem is that people are living longer…but not retiring later. That means pensions are having to last longer than they used to, which is often only possible if more has been saved into them, to begin with.
- Not planning sufficiently for having to manage your own pension
There have been dramatic changes to the pensions landscape, with Shell becoming the last FTSE100 company to announce the closure of its final salary pension scheme to new members in January 2024. Defined Benefit Pensions in the private sector are a thing of the past. That means more of the current generation of 20- to 30-year-olds are going to have to take control of their own pension savings than was historically the case. And not just while they’re working.
Defined benefit pensions meant your pension was sorted for life when you retired. New generations of pensioners will need to take responsibility for managing their own pensions throughout their retirement to make sure they don’t run out.
All of this leads to the same universal problem, namely a lack of control. Control over when you retire and what kind of lifestyle you lead in retirement will be more limited for those who’ve saved less.
It’s really as simple as that. If you want to have choices around when and how you retire, you’re going to have to accumulate sufficient financial assets while you’re working to give you that.
Why is starting to pay into a pension so important in your 20s/30s?
This is really a case of ‘do the math’, to put it bluntly.
A 40-year-old saving £200 a month into a pension which is growing at 4% a year will accumulate a fund of £74,326 by the age of 60.
A 20-year-old doing exactly the same thing will accumulate a fund of £237,184.
To flip that on its head, a 40-year-old would have to save £646.68 a month to accumulate the same pension fund of £237,184 at age 60 as a 20-year-old saving £200 a month.
So, starting your pension saving early is likely to mean much less pressure on your finances later in life, which, again, might lead to more choices around what you do with your time and money.
Why might younger people be choosing not to pay into pensions?
It could be down to societal changes over the last couple of generations.
- Do younger people expect more earlier in life than they used to, so they’re more inclined to spend and less inclined to save?
- With the significant boom in property ownership and property prices in the post-War period, are people becoming more used to inheriting from previous generations and therefore less inclined to save for themselves?
Or it might simply be that they have less opportunity to do so?
House price inflation has significantly outstripped earnings inflation since the 1970s, making it increasingly harder for younger generations to get onto the housing ladder. And yet we in the UK continue to be obsessed with property ownership, almost as a rite of passage. So maybe pension savings are losing out to house deposit savings?
Cost of living, as we know, has also been rising faster than wages until very recently. So, if those on lower disposable income, which tends to be the younger members of society, have to use a higher percentage of that income just to survive, opportunities for pension savings are naturally going to get squeezed.
What could improve this situation? If people are already struggling with their contributions now, is there anything they can do that won’t further stretch them?
There are a few things younger people could do to try and improve the situation for themselves:
- Pay attention to what your pension is invested in. If you’re in your 20s or 30s and planning to retire in your 60s, you’ve got a long investment timescale. That means you can afford to invest in assets which might be more volatile, but which have traditionally delivered better long-term returns.
- Be aware of charges. The higher the level of charges being deducted from your pension, the lower that pension fund will be at retirement. So, stay on top of what you’re being charged and whether there are lower charges available.
- Consider contributing to your workplace pension by the “salary sacrifice” method if your employer offers it. Not all employers do, but it is becoming more common. It means agreeing to a slightly lower salary in return for slightly higher corresponding pension contributions. The effect on your net take home pay should be negligible, but if your employer passes on their National Insurance savings (which, again, they don’t have to, but many do) it will mean more money being paid into your pension, earlier.
What else could help young pension savers?
If employers contributed more to their employees’ pensions, this would be hugely beneficial to workers of all ages.
Auto-enrolment, the legislation which made workplace pensions mandatory for all employees, started back in 2012. Broadly speaking, this set minimum contributions levels at 5% for employees and 3% for employers on “qualifying earnings” (between £6,240 and £50,270 in 2024/25).
We’re 12 years on from that now and it hasn’t changed at all. A review of auto-enrolment and whether it’s succeeding in its aim of making retirement savings easier for the general public might well suggest that some tweaks are needed, maybe around the thresholds at which contributions start and end, or the rate of contributions, or both?
How should someone start taking control of their pension and savings if they feel unsure?
We know these things can be a minefield if you’re not au fait with personal finance – and let’s face it, until it’s a subject that’s routinely taught in our secondary schools, not many people will be.
Talking to an experienced financial planner who can look at your whole situation and your long-term goals will really help give you the confidence and knowledge to get to grips with your finances.
It’s one of the best bits of Future Self Care you can invest in.
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
Based on tax legislation at the time of publication. Please be aware that there will have been changes since this was published. Speak to your adviser for the most up to date information.
*Defined Benefit Pensions pay you a guaranteed income in your retirement without having to rely on a finite pot of savings.
