We could be sleepwalking into a retirement crisis, with younger savers woefully underprepared for the demands their pension pots will face.
Forty-two percent of under-30s are currently at risk of poverty in retirement, according to pension firm Scottish Widows. The only other age group with an outlook this poor is 60 to 64-year-olds – however levels of home ownership among this group are higher than is expected for Gen Z at the same age.
Under-30s have benefitted significantly from the introduction of auto-enrolment, with millions more people saving into a workplace pension since the policy was introduced in 2012. However, significant challenges lie ahead given future housing costs.
Start your trial of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
The amount of additional savings needed to rent for 20 years in retirement is a whopping £391,000, according to financial services company Standard Life. In London, this figure rises to £833,000.
Latest Videos FromMoneyWeek
Those who do manage to get onto the property ladder risk their mortgage running into retirement, given the average age of first-time buyers is rising, hitting 34 in England in 2023/24. Ultra-long mortgages are also growing in popularity.
With high housing costs likely to eat into younger savers’ retirement income, they could be left increasingly reliant on the state pension. More worrying, then, is the fact that 46% of Gen Zs do not believe the state pension will exist by the time they retire, according to the Pensions Policy Institute, a research institute.
Industry experts have identified some of these as key challenges that need to be addressed through the second phase of the government’s pensions review. We take a closer look at ways of averting the crisis.
How much will under-30s have by retirement?
Separate data from PensionBee, the online pension service, paints a more promising picture, with under-30s supposedly on track for average pension savings of £181,165 by the time they turn 66.
Contrary to the findings in Scottish Widows’ report, this was the largest figure among any age group surveyed – but the outlook is still bleak when you consider the new financial demands younger savers are likely to face.
After taking 25% of the pot as tax-free cash, a pension of this size will buy you around £9,500 per year in annuity income, according to figures plugged into L&G’s annuity calculator. This assumes you opt for a single-life level annuity with a 10-year guarantee.
While this income might sound generous when considered in conjunction with the state pension (£11,973 per year), it is unlikely to stretch to housing costs.
The average monthly rent in the UK is currently £1,343, according to the Office for National Statistics, or £16,116 per year. If you deduct this from the two sources of pension income outlined previously (state pension and annuity), you are left with £5,357 to cover all other costs.
Even a basic retirement costs a single person £13,400 per year after housing costs, according to the latest figures from trade association Pensions UK – and that doesn’t cover the cost of running a car. A moderate retirement costs a single person £31,700 per year, and a comfortable retirement costs £43,900 per year.
On top of this, PensionBee’s report found that under-30s’ projected retirement pots have actually shrunk compared to last year due to falling incomes. “This is a worrying warning sign for future generations who may end up heavily reliant on the state pension,” said Lisa Picardo, the company’s chief business officer.
How to tackle the retirement crisis
The government may need to think outside of the box when tackling the impending retirement crisis. The second stage of its pensions review will focus on retirement adequacy, and is expected to launch soon.
Former pensions minister Steve Webb, now a partner at consultancy LCP, has suggested making pensions more flexible to help younger savers manage conflicting financial priorities.
“Younger generations face multiple financial pressures, including saving for a house deposit and paying down student debt, which can make finding money for a pension especially challenging, particularly when the prospect of retirement seems very remote,” he told MoneyWeek.
“One way of making pension saving more attractive would be to make pensions more flexible, with the possibility of using part of your pot to top up funds for a house deposit, or having a cash pot running alongside the pension providing a buffer for unexpected outgoings.”
While the idea of drawing funds from your pension to fund a house purchase is divisive, it could help tackle the impending crisis where future generations find themselves paying rent or mortgage costs out of insufficient retirement pots.
A cash sidecar could also help those savers who want to put money away for retirement, but are nervous about overcommitting in case they end up needing the funds for an emergency today. The self-employed are a key example.
Employers may need to play a part too. “At some point the government will finally recognise that the current standard pension savings rate of 8% is simply not enough to give most people a decent retirement and will raise contributions,” Webb said. “The first priority should be levelling up contributions so that both workers and firms are paying in equally.”
Other industry experts are also calling for the auto-enrolment age threshold to be dropped from its current level of 22, or for the earnings threshold to be dropped so that more part-time employees can benefit from the system. “The magic of compound growth makes early contributions incredibly valuable over longer periods,” said PensionBee’s Picardo. “We cannot allow today's contribution gaps to become tomorrow's retirement poverty.”
