Mind the generation gap in retirement savings

Affordability and confusion around pension rules are reasons for not saving more.

The financial squeeze on younger workers and complicated pension rules could fuel a future retirement crisis as young people either make only the minimum possible contributions to their workplace scheme or are put off pension saving altogether.

The findings are part of Prudential’s new, in-depth Intergenerational Retirement Study which tracks the finances of UK workers aged 21-65. The study has found that more than half of under-30s (53 per cent) either make only the minimum contribution required by their workplace pension scheme or have no pension at all.

Prudential’s research also shows that the proportion of those making only the minimum pension contributions decreases as workers get older – from 40 per cent for 21-30 year olds, to 30 per cent of 31-40 year olds, 22 per cent of the 41-50 age group to 16 per cent of those aged 51-65.

The reasons for the low levels of pension contributions, particularly among younger people, are not straightforward. Although nearly a quarter (24 per cent) of under-30s say they can’t afford to save into a pension, one in three (33 per cent) say they find the pension rules very confusing and more than half (53 per cent) wish their employer did a better job of explaining pensions and their benefits.

These factors all combine to raise concerns that people currently in the first half of their careers will have insufficient pension savings to support a comfortable lifestyle when they eventually come to retire. While those aged 51-65 estimate that on average their pension pots are currently worth a total of £114,000, it is unlikely that those aged 21-30 (with an average £15,000 in pension savings) and 31-40 year olds (with £26,000) will build up such a pot in the future without making significant changes to their saving behaviour.

The research also found evidence of people choosing to keep some of their money in other forms of savings, rather than pensions. On average, people save nearly £2,000 a year in addition to any pension contributions they make. For many this is simply to keep some savings accessible should they need them in an emergency, but other reasons for doing so tend to be more age-dependent, with younger workers more likely to be saving to buy a property and older workers putting money aside to top up their retirement income if needed.

Stan Russell, a retirement income expert at Prudential, said: “Pension saving is for the long-term and the contributions made earlier in your working life are obviously the ones that will have the best chance to grow and make a significant difference to your retirement. With this in mind, it is worrying that our research reveals that large numbers of younger workers are disengaged from providing for their own retirement.

“As life expectancy continues to increase and retirements get longer, it is inevitable that the responsibility for funding pensions will shift further and further away from governments and employers and more on to individuals. People who are members of workplace pension schemes benefit from employer contributions on top of their own and should try to save as much as possible from as early as possible in their working lives.

“Life can be complicated, and in many cases expensive, and there are often other financial demands that appear to be a block to retirement saving. However, for many people, a consultation with a professional financial adviser will help them gain a better understanding of the benefits of pensions and set up a savings plan that suits their personal circumstances.”