Strategies for enhancing your pension, as more than half of millennials seldom consider or plan for retirement contributions
Millennials Fall Short on Retirement Planning
New research indicates that millennials are not giving adequate attention to their retirement savings, putting them at risk of financial shortfall as they reach retirement age.
According to a survey conducted by Opinium and commissioned by the investment platform InvestEngine, nearly half (51%) of millennials, currently aged between 29 and 44, rarely think about their pension. This figure exceeds the percentage of older Gen X savers (38%) and younger Gen Z savers (41%).
This apparent disengagement with pension planning may be due to a lack of understanding of how the system works, with 37% of millennials admitting that they don't comprehend the fundamental mechanics of pensions.
Furthermore, 45% of this age group are unaware that they pay fees on their workplace pensions, while a third incorrectly believe that higher fees imply a higher-quality pension fund.
These statistics are particularly concerning, as millennials are now at the peak of their earning potential, offering a valuable opportunity to increase their retirement savings. However, a gap in knowledge can prevent savers from maximizing this period.
InvestEngine's head of investments, Andrew Prosser, warned that millennials might simply have fewer reasons to engage with their pension due to auto-enrollment, but the findings are still alarming. He highlighted the long-term impact that seemingly minute pension fees can have on retirement savings, revealing that seemingly small percentages can amount to life-changing sums over time.
Millennials Face Multiple Risks for Pension Shortfall
Aside from a lack of understanding, rising costs, longer lifespans, and lower levels of homeownership could all potentially leave millennials more vulnerable than previous generations. The cost of a comfortable retirement is now estimated to be £43,100 per year for a single person and £59,000 for a couple, according to figures from the Pension and Lifetime Savings Association (PLSA).
Moreover, these figures do not take into account housing costs, a growing concern for an increasing number of retirees still burdened with a mortgage or paying rent during retirement.
Investment platform, Interactive Investor, estimates that younger savers in their 20s might require a pension pot worth over £1 million to achieve a comfortable retirement in 40 years' time. While those willing to accept a moderate or basic standard of living may be able to get by with less, a moderate retirement still costs £31,300/£43,100 per year (singles/couples), while even a basic retirement costs £14,400/£22,400.
Many households will need to rely on private pension income, either in the form of an annuity or pension drawdown, to supplement the state pension.
To help bridge the gap, we offer six practical tips for millennials—and anyone at any age—to boost their pension savings.
Six Tips to Boost Your Pension
- Increase your pension contributions. As the standard of living increases with career progression, increase your pension contributions to take advantage of your peak earning years.
- Consider salary sacrifice. By reducing your gross salary and exchanging it for increased pension contributions, you can simultaneously lower your tax bill and boost your pension.
- Assess the fees on your pension. Check the fees on your pension fund, as older funds may have higher charges. Lower fees can help prevent your returns from being gradually eroded over time.
- Consider your investment mix. Consider the investment mix in your pension. Younger savers should typically invest in riskier assets with higher growth potential, as they have a longer investment horizon to smooth out volatility.
- Claim tax relief. Ensure you claim any tax relief on your pension contributions by filing a tax return if necessary.
- Track down lost pensions. Keep track of old pensions by contacting past employers and using the government's pension tracing service.
In times of economic uncertainty, it's crucial for millennials to address the gaps in their understanding of pensions and take proactive steps to secure their retirement savings.
- Despite being at the peak of their earning potential, millennials might be falling short in their retirement planning, as indicated by a newsletter from InvestEngine that reveals nearly half of them rarely think about their pensions.
- The personal-finance implications of this neglect could lead to a significant pension shortfall for millennials, especially when considering the additional risks they face, such as rising costs, longer lifespans, and lower levels of homeownership.
- To combat these risks and secure their financial future, millennials are advised to follow six practical tips for boosting their pension savings, including increasing contributions during peak earning years, assessing fees, considering the investment mix, claiming tax relief, and tracking down lost pensions.
- Moreover, it's essential for millennials to understand the workings of personal finance, including bonds, investments, and gold, as they relate to their retirement savings and pensions, since seemingly minor decisions can have a substantial impact on their long-term financial stability.
