Six ways to boost your pension as over half of millennials “rarely think” about retirement savings

Millennials are not giving enough thought to their pension, new data suggests, leaving them at particular risk of a retirement shortfall

Over half (51%) of this age group “rarely think” about their pension, according to an Opinium survey commissioned by the investment platform InvestEngine.

This is higher than both older Gen X savers (38%) and younger Gen Z savers (41%).

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It could be a case of savers burying their heads in the sand, with 37% of millennials stating they don’t understand how pensions work.

A startling 45% are unaware they pay fees on their workplace pensions, while nearly a third incorrectly believe higher fees mean the pension fund is of a higher quality.

This group is now aged 29-44, with many reaching the top of their career and their peak earnings potential.

This could offer a valuable opportunity to increase their pension savings – but savers can only maximise this window of opportunity by addressing the gaps in their knowledge.

“As the generation of auto-enrolment, millennials may simply have had fewer reasons to think about and engage with their pension, but this has led to some alarming findings,” said Andrew Prosser, head of investments at InvestEngine.

“Most concerning is the lack of understanding around the long-term impact that seemingly low pension fees can have on their retirement savings. Even small percentages add up to life-changing sums over time.”

Millennials at particular risk of pension shortfall

It is not just a lack of knowledge that is putting millennials at risk of a pension shortfall. Rising costs, longer lifespans and lower levels of homeownership could all leave them more vulnerable than previous generations.

The cost of a comfortable retirement is now £43,100 per year for a single person and £59,000 for a couple, according to the latest figures from the Pension and Lifetime Savings Association (PLSA).

These figures do not factor in housing costs, despite the fact that an increasing number of pensioners are still lumbered with a mortgage or paying rent in retirement.

Once inflation and housing costs are taken into consideration, investment platform Interactive Investor estimates that younger savers in their 20s could need a pension pot worth just over £1 million, if they want to achieve a comfortable retirement in 40 years’ time.

Those willing to accept a moderate or basic standard of living may be able to get by with less, but a moderate retirement still costs £31,300/£43,100 per year (singles/couples), while even a basic retirement costs £14,400/£22,400.

The state pension will help cover some of the costs, but most households will still need to supplement this with private pension income, either in the form of an annuity or pension drawdown.

We share six tips millennials – and those of any age group – can take to boost their pension.

Six tips to boost your pension

1. Increase your pension contributions

The good news is there are steps you can take to boost your pension pot – and millennials in particular could have a golden window of opportunity.

Many people find their career and salary accelerates from their late-twenties to mid-forties, which is how old this generation is now.

Under auto-enrolment rules, most workers contribute 8% to their pension, with employees contributing 5% and employers contributing 3%. As your salary increases, this standard 8% contribution is worth more.

As your pay packet gets bigger, you may also feel able to increase your contributions above the standard 8% level. Some employers will even match your contributions up to a certain level, if you decide to increase them.

Even a small increase could have a significant long-term impact, as illustrated by figures we plugged into Standard Life’s pension calculator.

We chose a 36-year-old (someone in the middle of the millennial age group) earning £30,000 per year, and boosted their annual pension contributions by 2% above the standard auto-enrolment level.

By the time the saver reaches state pension age, this small boost could add £34,500 to their pension pot, assuming a moderate investment growth rate of 5% per annum, and annual investment fees of 0.75% (the current cap for workplace pensions).

Standard Life recommends boosting your contributions by even more than this, if you can. The pension expert says 12-15% could help you achieve a comfortable retirement. This includes your personal contributions, your employer’s contributions and tax relief.

2. Consider salary sacrifice

Salary sacrifice is a good option for some pension savers, as it can boost your pension while simultaneously reducing your tax bill. You essentially enter into an agreement with your employer where you reduce your salary in exchange for an additional pension contribution.

“Increasing numbers of employers now offer these schemes that let staff reduce their salary or bonus payments in lieu of increased pension contributions,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“This is because by reducing your gross salary, it reduces the amount of income tax a worker must pay and the National Insurance contributions for both the employee and employer.”

Salary sacrifice could be a particularly good option if you are close to the higher or additional-rate tax threshold, as you lose certain tax perks once you cross into a higher tax bracket.

For example, the personal savings allowance is halved from £1,000 to £500 for higher-rate taxpayers and disappears entirely for additional-rate taxpayers, meaning you can earn less tax-free interest on savings.

Once your earnings hit £100,000 per year, you start to lose the personal allowance too, meaning less of your salary is tax-free. The personal allowance is £12,570 per year for workers who earn less than this threshold. Once you cross the threshold, you lose £1 of the allowance for every £2 of taxable earnings over the limit.

“Combine the loss of the personal allowance with the 40% income tax rate [for higher-rate earners] and those earning between £100,000 and £125,140 under the current rules are effectively paying an eye-watering effective rate of income tax of 60% on that portion of their income,” Haine said.

3. Assess the fees on your pension

Fees on workplace pensions are currently capped at 0.75%, but older funds could have higher charges, so it is important to check what you are paying. Shopping around for a fund with lower charges could help you prevent your returns from being eroded over time.

Worryingly, 45% of millennials are unaware they are paying fees on their workplace pension, according to InvestEngine, while nearly a third incorrectly believe a higher fee is an indication that the fund is of a higher quality.

A 0.75% annual management fee means you will pay 7.5p per year for every £10 in your pension. If you have £10,000 in your pension, you will pay £75 a year. If you have £100,000, you will pay £750.

Reducing this to a 0.4% annual management fee would mean you paid 4p per year for every £10 in your pension. If you had £10,000 in your pension, you would find yourself paying £40 a year, and so on.

These sums can really add up over time, particularly when you take investment growth into consideration too.

4. Consider your investment mix

Another tip is to consider the investment mix in your pension. Younger savers should usually be taking on more risk than their older counterparts, as they have a longer investment horizon ahead of them to smooth out volatility.

This means they should generally be invested in more volatile investments like global equities, which have a higher return potential than assets like bonds or cash.

When your employer enrols you into a workplace pension scheme, they usually put you into a default fund. If you feel comfortable doing so, look at the other funds on offer and consider whether they better meet your needs.

With millennials being aged between 29 and 44, most still have at least twenty years of work ahead of them, meaning it is too early to start de-risking their pension by allocating heavily to lower-risk assets like bonds and cash.

5. Claim tax relief

When you pay into a pension, you are entitled to tax relief on your pension contributions. This is effectively an income tax refund, paid at your marginal rate (20%, 40%, or 45%).

If you are in a “net pay” pension scheme where pension contributions are made before you are taxed, you will automatically receive any tax relief you are owed without having to claim it.

However, if you are in a “relief at source” pension scheme (where contributions are made after tax is deducted), you may need to take action. The first 20% will be refunded automatically, but higher and additional-rate taxpayers will need to claim the remainder by filing a tax return.

Most workplace pensions are “net pay” schemes, while self-invested personal pensions (SIPPs) are generally “relief at source”. It is always worth double-checking.

6. Track down lost pensions

Finally, most of us change jobs several times over the course of a career and can lose track of pension savings along the way. Nearly one in five adults think they fall into this group, according to PensionBee, the online pension service.

You can find an old pension by contacting past employers to find out who the pension provider was. Then get in touch with them to enquire about your retirement savings. You will usually need your National Insurance number and details of when you worked there.

The government also has a free pension tracing service.