Why Millennials Cant Rely On The State Pension!
According to a new study released this month by pensions investment company Royal London, the vast majority of Millennials – those born between 1980 and 2000 – will need to save £260,000 over their lifetime to avoid a drop in living standards when they stop working.
This figure rises to £445,000 for those who aren’t able to get onto the property ladder. In a bleak assessment for millennials Steve Webb – a former pension’s minister and the director of policy at Royal London – stated the vast majority of people saving with the government pension scheme would likely only manage to save half of the target amount.
The pension mountain
The report titled “will we ever summit the pension’s mountain?” looks to answer the burning question– how much do we need to save for retirement?
The paper highlights the amount needed to retire comfortably has risen about 75% since 2002/03 from £150,000 to £260,000, this is due to lower life expectancies and higher interest rates.
The calculations used to reach these figures make several assumptions about the person’s life – they will have paid off their mortgage, be receiving a full state pension and retire at the age of 65.
Even more concerning, a third of younger workers who will never be homeowners and face a life time of renting – even when they retire – will have to save considerably more.
Those renting from their local authority or housing association would need an extra £125,000 in pension savings on top of the suggested £260,000 and those renting privately would typically need to find £6,554 a year to pay private landlords.
This additional cost means they will need to save a staggering £445,000 to fund their retirement.
Webb stated the average amount saved into pension pots is around £30,000 to £40,000, however this data is incomplete as people tend to have separate pension pots for different employers throughout their career.
The number of people who are enjoying a final salary pension is dwindling and the majority of millennials in the private sector will need to rely on the amount that is saved into their company scheme when they finally retire.
Helen Morrissey, Personal Finance Specialist at Royal London said “The government needs to act quickly to nudge people up to more realistic savings levels. Without this, many millions of people will face a sharp drop in living standards when they retire.”
What is the government automatic enrolment scheme?
Every worker in the UK aged 22 or over who earns more than £10,000 per annum, automatically pays into a workplace pension scheme. The system automatically takes a portion of your pay and places it into a savings pot which is then topped up by your employer.
What you pay all depends on how much you earn. You pay a percentage of your wage, so the more you earn the more you pay in. The total minimum contribution is currently set at 5% of your earnings – you pay 3% and your employer pays 2%. This is set to rise to 8% by April 2019.
If you don’t meet the criteria you can still opt-into the workplace pension (if you’re 21), however your employer doesn’t have to contribute as they do with the auto-enrolment.
To encourage younger people to start saving for their pensions- especially in light of the study conducted by Royal London- the government is considering extending the auto-enrolment to include 18-21 year olds. However Iona Bain, founder of the Young Money blog has said lowering the enrolment age to 18 is insufficient and doesn’t solve the pension crisis in the long-term.
If you don’t want to pay in to the scheme then you have to opt-out. Martin Lewis from Money Saving Expert is a big fan of the scheme he states “We need to help people to help themselves, and inevitably most of us are guilty of decision-making focused on the now, not the future. Nowhere is that more important than when it comes to pensions. So any help to change behaviour is useful.”
5 ways to start building your pension now
So taking into account this recent analysis coupled with research conducted last year suggesting half of the workers in the UK bury their heads in the sand when it comes to pensions, with just under half having no idea what they need to save for retirement and 51% having nothing saved at all into their pensions, we have put together 5 top tips for growing your pension now, as thankfully it’s never too late to start saving.
1. Calculate what you need
How much is “enough” depends on a variety of factors, including the length of time you have left to save, your salary, whether your mortgage will be paid off or if you will be paying rent when you retire. It’s also a good idea to factor in any other income you may have including your state pension.
PensionBee have a handy pension calculator which tells you how much you need to save each month to reach your target based on the above information. Once you know exactly how much you need and have a specific target in mind, you will be in a better position to put your saving plan into place.
2. Don’t delay saving into a pension
We know pensions aren’t the most glamorous and saving for a rainy day can sometimes seem like a challenge, however if you are in a position where you can start saving it’s important you do as a pension protects your future and allows you to maintain the lifestyle you are accustom to, rather than worrying about how you will make ends meet when your working life stops.
It pays to start saving sooner rather than later. Figures from Scottish Widows shows the longer you leave saving, the amount you need to put away each month grows considerably. However with pensions it’s never too late to start saving as every little helps.
3. Find and combine your pensions
It’s likely you will have various employers before you retire and have a few workplace pensions dotted around, it is important to keep track of these as forgetting about them can end up costing you – there’s an estimated £400 million in unclaimed pensions out there – so you may be surprised at what you uncover once you start digging.
The first place to start is to hunt down any annual statements or enrolment letters you may have been sent as they will let you know how much money is saved into your old pots. The government have a handy pension tracing service that can help you find any old workplace pensions.
The next step is to bring all these pensions together into one pot. By doing this is it will make managing and saving much easier, you will also reduce the amount of fees you pay on each individual pot.
4. Make regular contributions to your pension
We know life can be expensive and sometimes throw you some unexpected curveballs, which makes it tempting to cut back on your pension. However, considering the statistic that the average person needs to save an additional £260,000, it’s important you are strict, especially the later you start saving.
It’s important to only save what you can comfortably afford on a regular basis, if you happen to come into an unexpected windfall, try to save some of that into your pension – you future self will thank you! Also if you pay more into your workplace pension than 3% some employers may increase the amount they pay in too.
If you do unfortunately happen to come into financial trouble which makes paying into you pension impossible, don’t give up hope. You can get your retirement back on track at anytime
5. Don’t depend on your state pension
Rather than relying on the state pension as your only source of income during your retirement, you should treat it as a little extra to top up your personal/workplace pension.
As the retirement age has risen to 65 for both men and women and projected to be 67 by 2028, you won’t be able to access it until you reach this age. So it’s a good idea to have something else to live off if you plan to retire earlier.
Of course the state pension is very useful to have in retirement but as the total amount is only £8,546.20 a year, it’s a long way from the estimated amount you will need.
To qualify for the full state pension it’s not how much you have paid in but the number of years – you will you need to have contributed to National Insurance for at least 35 years. If you have taken time away from work to raise a family you may be entitles to National Insurance credits please check the government website.
Remember the amount you will need to save depends entirely on your personal circumstances, and you can start saving towards your retirement at any age but the earlier the better.