Are young people heading towards a pension crisis?

The younger gen­er­a­tion of work­ers face a tor­rid finan­cial future. Pre-pan­dem­ic, many strug­gled to buy their own home or save reg­u­lar­ly. Post-pan­dem­ic, that may prove even more dif­fi­cult. Ris­ing unem­ploy­ment, a dras­ti­cal­ly dif­fer­ent work­ing envi­ron­ment and tax increas­es to pay for gov­ern­ment fur­lough and busi­ness sup­port will all plague their pock­ets for years to come. 

And with the state pen­sion start­ing age expect­ed to rise even fur­ther, per­haps even to 75, it appears wor­ry­ing that research by Roy­al Lon­don found two in five mil­len­ni­als aged 18 to 34 had stopped or reduced their pen­sion con­tri­bu­tions fol­low­ing coro­n­avirus. A sur­vey for Unbiased.co.uk also report­ed 24 per cent of under 35s said they had no pen­sion sav­ings at all. 

The gov­ern­men­t’s work­place auto-enrol­ment scheme has gone some way to head­ing off a cri­sis, but it fails to take into account the many young peo­ple in casu­al or inse­cure gig econ­o­my roles or the self-employed. Encour­ag­ing them to fund a self-invest­ed per­son­al pen­sion, or SIPP, can be tough when mon­ey is tight and retire­ment seems like a dis­tant dream.

Matthew Arends, head of UK retire­ment pol­i­cy at Aon, says: “At times of pres­sure, it is nat­ur­al to focus on the short term over the long term. The issue with auto-enrol­ment is it does­n’t apply to the self-employed, for whom there are no min­i­mum sav­ings require­ments, nor for the unem­ployed. The under-employed will tend to under-save too, despite auto-enrol­ment. 

“Although it is easy to talk about man­dat­ing increas­es to min­i­mum con­tri­bu­tion lev­els, the real­i­ty is if indi­vid­u­als are paid less or work less, it won’t trans­late into high­er sav­ings lev­els.”

Some sug­gest ways to change this. For exam­ple, Jon Greer, head of retire­ment pol­i­cy at Quil­ter, rais­es the idea of allow­ing employ­er-only con­tri­bu­tions for auto-enrol­ment, which could ben­e­fit younger peo­ple on low­er salaries and with less dis­pos­able income. 

And Mark Pem­berthy, head of defined con­tri­bu­tion and wealth at Buck, believes reduc­ing the auto-enrol­ment age to 18 and remov­ing the low­er thresh­old of earn­ings that isn’t pen­sion­able would “make a big impact to the amount of mon­ey saved by this gen­er­a­tion”.

Changing pension habits with a nudge

Behav­iour­al sci­ence is also being used. Last Sep­tem­ber, the Behav­iour­al Insights Team and Scot­tish Wid­ows found, in a UK study of 3,000 22 to 29 year olds, that a num­ber of so-called “nudges” could boost younger peo­ple’s retire­ment funds.

It point­ed to using the word “invest” over “save” while also explain­ing the ben­e­fits more. “By includ­ing tan­gi­ble expla­na­tions such as ‘a 12 per cent con­tri­bu­tion would keep you above the pover­ty line’ and ‘a 15 per cent con­tri­bu­tion would allow for a com­fort­able retire­ment’, twice as many young peo­ple would rec­om­mend almost dou­bling pen­sion con­tri­bu­tions from the default min­i­mum of 8 to 15 per cent,” the study says. 

How­ev­er, it also dis­cov­ered that before the pan­dem­ic, 49 per cent of that age group were not sav­ing ade­quate­ly for retire­ment.

One who is, how­ev­er, is Lewis Hard­ing, a 22-year-old accoun­tant in train­ing. Aim­ing to retire by 55, he uses Free­trade to man­age his funds, but high­lights a grow­ing prob­lem for his peers, the move from a job for life to more port­fo­lio careers. 

“Auto-enrol­ment fixed one issue, but young peo­ple are more like­ly to move around jobs, espe­cial­ly in their 20s,” he explains. “I’ve found it stress­ful to keep track of pen­sion pots you can col­lect along the way. If I for­get about one, it might mean valu­able sav­ings are slow­ly erod­ed away. 

“The dif­fi­cul­ties with con­sol­i­dat­ing and trans­fer­ring pen­sions can put many peo­ple off and this effec­tive­ly elim­i­nates the ben­e­fit of start­ing invest­ing ear­ly to give your­self as much time as pos­si­ble to grow your sav­ings.

“When join­ing a com­pa­ny scheme, if employ­ees were giv­en a default option to have employ­er con­tri­bu­tions either go there or to a pre-exist­ing SIPP, this would go a long way towards sim­pli­fy­ing the pen­sions sav­ings process in my view.

“Rather than see­ing state­ments with each new employ­er look­ing pal­try and unin­spir­ing, a default con­tri­bu­tions option could help dri­ve home the pow­er of reg­u­lar sav­ings and com­pound inter­est.”

Let young people invest in their priorities

Anoth­er idea to pre­vent a pen­sions cri­sis among the young comes from Ben Pol­lard, founder of Cushon, which recent­ly announced the launch of the “world’s first” net-zero pen­sion. 

“If we want the younger gen­er­a­tion to engage more with pen­sions, we need to give them some­thing they want and can real­ly get on board with. Green invest­ing and pro­tect­ing the plan­et is some­thing they feel very strong­ly about and 62 per cent of under-35s told us they would engage more with their pen­sion if they knew it was mak­ing a pos­i­tive impact on cli­mate change,” he says. 

It’s not all doom and gloom how­ev­er. Research for dig­i­tal wealth man­ag­er Mon­ey­farm found 50 per cent of 18 to 34 year olds with a SIPP invest­ed more or opened a new account dur­ing lock­down. A quar­ter were more like­ly to set ear­ly retire­ment as a finan­cial goal fol­low­ing the pan­dem­ic. 

Sim­i­lar­ly, Pol­lard saw a 50 per cent increase in those under 24 sav­ing in a pen­sion com­pared to before the pan­dem­ic, with 83 per cent of under-35s and 92 per cent of under-30s choos­ing its high­est risk fund com­pared with 66 per cent who are 35 plus.

Accord­ing to dig­i­tal invest­ment ser­vice Wealth­i­fy, 30 per cent of its SIPP cus­tomers are under 35, with many in typ­i­cal self-employed or gig jobs, such as elec­tri­cians, brick­lay­ers, gar­den­ers and musi­cians.

David Brooks, tech­ni­cal direc­tor at Broad­stone, con­cludes: “Although cur­rent cir­cum­stances are dif­fi­cult, young peo­ple should not lose heart. There are advan­tages to sav­ing ear­ly in a pen­sion, but pen­sions are not every­thing. If a pen­sion feels like some­thing that is lock­ing mon­ey away for too long, younger peo­ple should con­sid­er a life­time ISA. The old adage is true though: if you can afford it, the small­est amount is bet­ter than noth­ing.”