Updated 27 April 2021
When the going gets tough, the tough get going. New findings show that the pension saving message is at last filtering through to young people. But are the older generations now the ones who are being complacent? Article by Nick Green.
Generation Z (adults under 24) are already poised to overtake Millennials in the race to be ready for retirement, according to a new survey. Thanks to auto-enrolment – but also to their own higher levels of personal engagement – Gen-Z adults are already the most likely generation to be saving into a pension, and the most likely to know how much they’ve saved to date. By contrast, Generation X (now aged 41-54) are the least likely to know how much they have in pensions, despite some of them facing retirement with the next decade.
The research, by online provider PensionBee, compares the three pre-retired generations side by side: Generation X, Millennials (or Generation Y) and Generation Z (fondly known as ‘Zoomers’). In some respects it offers the most encouraging outlook for years, in showing that the young are already engaging with pensions at the time when this can benefit them the most. But it should also serve as a wake-up call for older savers who may have been slower off the mark at the start of their careers.
The newest wave of adults, Gen-Z are the first generation with little or no experience of a pre-internet world, and the first to have been steeped in online media virtually all their lives. This ‘plugged in, always on’ mindset may have done a lot to help them stay informed about the challenges to come in later life. Naturally, auto-enrolment has been a big factor in getting these savers off the starting blocks, but it clearly isn’t the whole story. Whereas previous generations have done much of their pension saving ‘in their sleep’ and not given it much thought, Gen-Z adults show themselves to be unusually well informed about these issues, even though they won’t affect them directly for 40 years or more.
Around 77% of the Zoomers surveyed said they knew exactly how much pension they have saved to date – the highest proportion who did. By comparison, only 74% of Millennials knew, and a disappointing 66% of Gen-Xers. This may partly be due to the fact that Zoomers have only just started to save (so don’t have as much to keep track of), but it’s likely that being more digitally-minded helps too. Gen-Z are the most likely to have everything on their phones, including online pension statements, while Gen-X and even many of the older Millennials are likely to be still relying on annual paper pension statements, which are easily lost or misplaced.
Older pension savers are also more likely to have multiple pension pots saved with previous employers – some of which they may have forgotten about. Tracking down old pensions should be a priority for anyone in this position, but of course many may not even realise that this is something they need to do.
Zoomers are also showing an encouraging blend of optimism tempered by realism. On the one hand, they are hoping for an average retirement age of 58 while Gen-Xers are targeting a (still optimistic) 61. But they accept that the pandemic may have pushed their plans back, and are the most pessimistic here – reckoning a two-year delay to retirement, while only a third of Gen-Xers expect any delay at all.
Romi Savova, CEO of PensionBee, says, ‘It's very encouraging to see the younger generation preparing for their future, proving that it’s never too early to start thinking about retirement. Most savers would like to retire early, so it’s of paramount importance that they build up a personal pension … in order to not have to keep working until the state pension age of 66.’
So far, so encouraging. Still, there are clues in the research to suggest that some of Gen-Z’s pension confidence may be due to youthful naivety. One striking finding was the size of pension savings accrued to date. Gen-Xers have saved an average of £33,547 while Millennials have an average £22,049 – bearing in mind that these averages are brought down by the 14% in each group who say they have zero pension savings. Meanwhile Zoomers claim an average pension pot of £21,765 already – only just behind Millennials.
The Gen-Z average will be boosted by the fact that only 3% say they have no pension savings at all. Even so, this figure seems surprisingly high – and perhaps unrealistically so. The oldest Zoomers, at 23, will have been saving for only five years. To save over £21k in that time would need monthly contributions of £325 at an average 4% interest. Assuming that this is the minimum 8% of salary (with the employer paying at least 3%) and allowing for tax relief, this would require the 23-year-old to have been on a salary of around £40,000 since the age of 18. And given that the £21,765 is said to be an average, younger Zoomers would need an even higher salary – or else pay in far more than 8% of their earnings.
Of course it’s not impossible that Gen-Z adults on junior staff salaries are making 16% pension contributions – but it does seem highly improbable. The PensionBee research on the size of Zoomers’ pension pots should therefore be treated with caution. And if Zoomers are mistaken about how much they’ve saved so far, then they too may need double-check what they think they know about pensions.
That aside, at this stage Zoomers don’t really need to do anything different. Just regularly saving into a pension in one’s twenties is the single best way to prepare for retirement.
So what about the older generations – the Millennials and the soon-to-retire Gen-Xers? Other research has already indicated that Generation X may face more pension problems than expected. The PensionBee findings corroborated this, with Gen-Xers feeling doubt over their retirement prospects and 16% afraid that their lifestyles will suffer after they stop work. More Gen-Xers than Zoomers said they didn’t know how pensions work – though this may be the wisdom of maturity being able to admit ignorance.
Other projections show that a daunting task awaits those Gen-Xers and Millennials with lower pension savings. The ‘Class of 2021’ report by Standard Life Aberdeen reveals that retirees hope on average for an income of £21,000 a year. But to achieve this, the report says that a person would need the full state pension plus a private pension pot of about £390,000. If the PensionBee findings are close to reality, then they suggest that the average Gen-Xer doesn’t yet have a tenth of this amount.
Seen in those terms, the picture looks pretty grim. But those with a few years ahead of them shouldn’t despair.
Here’s an example. Rachel is an average Millennial, aged 32 with a salary of £30,000 and pension savings of £22,000. If both she and her employer make the minimum pension contributions, then with tax relief that means £231 goes into Rachel’s pension each month. Assuming 4% interest, then by the time Rachel is 65 her pension pot will be worth over £271,000. That might not be as much as some people hope for, but it’s comfortably enough to beat the average UK retirement income. And by raising her contributions just a little, Rachel could save considerably more.
Meanwhile Gen-Xers have between 10 and 25 years to take similar action and give their pension a final push. The key message in all these findings is that it’s never too soon, or too late, to boost your retirement savings. If you are one of the many who have left it late, don’t panic – a few years of extra saving can make a lot of difference. And if you’re a Zoomer just starting your career, just keep making those contributions. With 40 years of compound interest on your side, the sky is the limit.
For advice on pension saving at any age, talk to a financial adviser.
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