Pension savings habits can impact people across their lifetimes, as not saving enough while working could make a person’s retirement years difficult. Recent research from a number of organisations showed millenials are struggling to put away money for their later years and older generations, such as baby boomers, may pay an additional price for this.
In late June, Profile Pensions produced a study which highlighted three in 10 millennials aren’t saving into a pension pot at all, with a quarter finding pension rules “very confusing”.
Additionally, 28 percent of the millenials questioned expressed a lack of confidence with money and financial matters, highlighting an overall lack of awareness.
Where younger savers are putting money away, further analysis of recent ONS figures found that the young are unlikely to be “as rich” as their parents in retirement.
On June 24, the Government released the results of its Financial Survey of Pension Schemes for the last quarter of 2020.
This data showed:
- There were 23.2 million members of defined contribution (DC) occupational pension schemes in the last quarter of 2020 (22.4 million in the same quarter a year earlier).
- There were 17.8 million members of funded defined benefit and hybrid (DBH) pension schemes (18.3 million a year earlier). Only 3.4 million of the DB members are active.
- 98 percent of benefits paid in the quarter were from DB schemes.
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, broke down what these figures meant: “You may not be as rich as your parents in retirement, because the lion’s share of money being drawn from pensions at the moment is from generous defined benefit schemes, but if you’re paying into a scheme right now, you’re far more likely to have a much less sizeable DC pension.
“It means there’s a risk today’s workers are being lulled into a false sense of security by the enviable lifestyles of many of today’s pensioners.
“Not all pensioners are enjoying bumper incomes, but plenty of them are. It means we may look to older members of our family and assume we can look forward to a retirement of socialising, travel and expensive hobbies (except for in times of a global pandemic of course).
“Meanwhile, there’s every chance we’re paying the minimum into a defined contribution pension we’ve been automatically enrolled into. And while it’s clearly vastly better than making no preparations at all, it’s not going to provide the same kind of lifestyle. Over time, the number of people paying into DB continues to fall, while DC keeps rising, so more and more people will end up with less generous pensions than their parents.”
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These pension trends are, unfortunately, set to make retirement even more difficult for older generations as they may need to fund their children and grandchildren.
This may prove to be especially prevalent as Emma-Lou Montgomery, an Associate Director at Fidelity International, warned life expectancy rates will place burdens on limited resources.
Ms Montgomery explained: “According to the latest data from the Office for National Statistics (ONS), the UK’s 90-years plus population grew to its largest size in 2019. If this trend continues, many more of us should plan for our pensions to last potentially far longer than we might currently be anticipating.
“Research by Fidelity International shows that becoming financially secure is a life goal for nine out of ten people, but 50 percent of the population are yet to achieve this goal. This increases to two-thirds (63 percent) of those in their 20s and 55 percent of those in their 30s – meaning that younger generations may be looking to family members for support.
“Unfortunately, only 30 percent of people think they will have enough in their pension pot to fund the personal income they would like in retirement. Having to financially support other family members would put these less-than-adequate savings under even further pressure. If you are thinking about supporting your family financially, it’s important you assess your own retirement needs and how you plan to fund these first to avoid being left with a shortfall.
“The growing reliance on intergenerational wealth only exemplifies how important financial literacy is – showing children how to handle their finances from a young age could be a way of easing pressure on older generations – as well as the value of having open conversations about financial planning.
“However, if you are unsure as to how much you will need during retirement for yourself or to help those closest to you, it may be worth speaking to a financial adviser. An adviser can help you work out what you can afford, while at the same time setting out your options for passing on wealth now or in the future.”
In adding more difficulties, the pandemic may have sped up this process, with additional research from Killik & Co. finding that 48 percent of UK grandparents have stepped in to financially support their grandchildren during the outbreak.
At the same time, 20 percent said they were worried about the value of their private pension and a further 13 percent are also worried about the stability, as well as the value of their workplace pension(s), amid continued uncertainty.
Svenja Keller, the head of wealth planning at Killik & Co., concluded on these difficulties and provided guidance to affected retirees.
Ms Keller said: “Much of the focus around the financial fall-out from COVID-19 has been on the recent volatility and concerns about the value of pension pots, but the pandemic has hit all generations. Our research shows that grandparents want to provide for their families, even if this makes them worry about their own financial future.
“However, it shouldn’t be the case that they are choosing their family’s financial stability over their own.
“If you’re a grandparent, it is important to secure your own lifestyle first, and only then gift what is possible. Understanding your long-term cash flow – for example tracking income and outgoings and looking at how your existing assets can support you – is key to putting a plan in place. This will provide you with the clarity you need for your own situation and ultimately help you to make decisions about providing sustainable financial support to the younger generations as well.”