It’s generally accepted that today’s younger workers won’t retire on the same generous pensions as the so-called baby boomers now moving into old age with comfortable and guaranteed incomes. However, new research suggests this may not be the case at all. In fact, says the Resolution Foundation, the millennial generation is set to end up with broadly similar levels of retirement income to the generations it succeeds.
There are two explanations for this, according to the think tank. First, while the guaranteed income of a final-salary pension scheme is valuable, most members of such plans do not qualify for the maximum level of payout. In theory, these schemes pay up to two-thirds of a pre-retirement salary as pension, but the typical baby boomer currently replaces only just over half of their income with pension benefits on retirement.
The second factor in millennials’ favour is the introduction of the auto-enrolment regime, which requires all employers to provide staff with an occupational pension scheme. Employers automatically enrol all staff in the scheme, other than those who have specifically opted out, and make contributions on their behalf.
Thanks to auto-enrolment, workplace pension saving is now at an all-time high; also, many millennials have begun saving at a much earlier stage than their parents and grandparents. So while their workplace schemes are less generous than the defined-benefit funds that are mostly now closed to new members, they’re paying in for longer.
As a result, although some older members of the workforce today are likely to do worse than baby boomers, younger people are on target for a comparable level of income, including state and workplace pensions. But while this sounds like good news for millennials, it’s worth acknowledging that the average young person will only be able to produce this level of retirement income by contributing more to a pension and from an earlier age than baby boomers.
It’s also important to note that these suggestions of comparable income don’t take into account home ownership – many young people won’t have that wealth to fall back on, or will still be paying off their mortgage in retirement.
How much can you expect to get in retirement?
The average pension income for a man retiring in 2020 will be around £310 a week, including state and private pensions, forecasts the Resolution Foundation. This will fall to around £285 a week in the 2040s, in today’s value, which is when the current generation of 40-somethings are due to retire; they have missed out on the most generous occupational pension schemes and auto-enrolment has only recently begun to help them. Thereafter, however, pension incomes will pick up again – to around £300 a week in the 2050s.
The changing work patterns of women mean they will do even better, in comparative terms. The think tank reckons the average pension income for women will rise from £225 a week in 2020 to £235 by the mid-2030s onwards. The lower figure reflects the career breaks that women are, on average, more likely to take.
The implication of these figures is that today’s average “replacement rate” – the proportion of pre-retirement income that someone receives in retirement – of 54% is likely to remain broadly similar for future generations, other than for workers currently in their 40s.
Teenagers could be made to save for retirement
The government is understood to be considering lowering the age at which employers have to begin automatically enrolling staff in a workplace pension from 22 to 18. The proposal is being discussed as part of the government’s review of auto-enrolment, which has boosted membership of occupational pension schemes by around eight million people since its phased introduction began five years ago.
Under today’s rules, any worker aged 22 or over and earning more than £10,000 has to be enrolled in their employer’s pension scheme, unless they have specifically opted out. Workers aged 18 to 21 can’t be enrolled automatically, though they can ask to join the scheme if they are earning £5,876 per year or above (those earning less can still ask to join a scheme, to which an employer must allow them access, but the latter then does not have to make contributions on the employee’s behalf).
Lowering the qualifying age would mean more people save for longer in an occupational scheme, compensating for the fact that many plans set up under auto-enrolment are less generous than more traditional workplace pensions. However, younger workers tend to earn lower wages and may feel less able to afford a pension contribution. From 2018, the minimum contribution for workers goes up from 1% of salary to 3%, and is due to rise again to 5% in 2019.
Tax tip of the week
Buy-to-let investors who own property via a company are set to lose a capital-gains tax (CGT) perk. At the moment, the indexation allowance means that companies can ignore any increase in value due to inflation, and only pay CGT on the remainder of any gains, all at a corporate rate of 19%, as opposed to an individual’s CGT rate of 28%. But in last month’s budget, Chancellor Philip Hammond announced that this indexation allowance would be frozen from January 2018.
The move is designed to help level the playing field further between buy-to-let landlords and first-time buyers. The change will not be retrospective, so companies will only have to pay CGT on the full increase in price that occurs from January 2018 onwards.