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The problem with a pensions crisis is that you might not know you’re in one until it’s too late to do anything meaningful about it.
Take Gen Z. The average 18 to 28-year-old hopes to retire at 60, according to new research from Standard Life. It’s an ambitious aspiration that’s well ahead of their state pension age of at least 68 (who knows what it will be by the time they come to retire — if it exists at all).
But there’s a bigger problem. Wealth manager Rathbones put out an alarming study recently saying that when they come to retire, Gen Z will need a pension of at least £3.1mn to afford a comfortable retirement. It arrived at that figure by taking the £1.4mn pot it thinks you need today and applying inflation to it for 65 years, spanning working life and 25 years of retirement, at 2 per cent a year.
Whether that figure works out to be accurate — I happen to be sceptical myself — or it’s £2mn, £1.8mn or less, younger workers can’t take it for granted that they’ll be able to afford a long, comfortable retirement.
Many “Zoomers” have portfolio careers, sometimes relying on gig work or holding down multiple part-time jobs — not ideal conditions to start building a nest egg. Add in high student debt and unaffordable housing, and it’s no surprise that Standard Life found this week that only 13 per cent are prioritising pension saving.
The big mistake is believing that minimum contributions via auto-enrolment to a workplace scheme will deliver. Standard Life found that 59 per cent of Gen Z think this.
If a 25-year-old earns £35,000 a year, the minimum level auto-enrolment saving level is £2,300 per year. Government figures show the average additional savings at this salary level amount to only an extra £560 per year — that’s never going to get you anywhere near £3.1mn. Assuming wage growth in line with inflation and a 5 per cent return on your pot every year, wealth manager Rathbones calculates that a 25-year-old needs to put away £1,600 a month.
That may seem like an unrealistic figure, but deferring until a time in the future when your pay is much higher is also not the most sensible tactic. If you want to turbocharge your pension, the time to act is now.
Take it from me, those early days are the most powerful force you can harness in your financial life due to the power of compounding. My pension from six years in my 20s — when I was a low earner — is now, in my 50s, worth easily more than the one in my 40s when I earned significantly more.
The first thing to do, if you’ve had frequent job changes, is consolidate any small deferred pension pots you may have accumulated from working in different jobs. I consolidated the ones from my 30s and 40s (alongside some little stray pots) but left that one from my 20s on its own as it had low fees. Moving them into a self-invested personal pension (Sipp) can stop you losing track and might even lower the cost. Independent website Money to the Masses says the cheapest Sipp is Vanguard’s up to £100,000 and then Interactive Investor for larger portfolios.
Then check what you’re invested in. If your workplace pension is in the default fund, equity exposure is likely to be low — perhaps as low as 50 per cent. Analysis of default funds by PensionBee found that average returns are below the 5 per cent level that many would consider to be “good”.
If you’ve got three decades until retirement, your capacity for risk is as high as it’s ever going to be, so you might want to consider being all in equities.
It’s also the time to put in as much extra money as you can. In your 20s or 30s, maximising your pension funding up to £60,000 a year or your earned income — whichever is the lower — only for a few years can have a massive impact. Wealth manager Tideway Wealth calculates that £180,000 added to your fund in your early 30s, which might cost only £100,000 after tax relief, could add £580,000 in today’s money to your fund by the time you hit your early 60s.
Another tactic — admittedly only open to the luckiest — is to ask for assistance. Wealthy parents and grandparents are increasingly providing a helping hand, financial advisers report, since they will have to pay inheritance tax on any unspent pension passed on from April 2027.
Gifts from spare income will immediately reduce an estate for IHT purposes. Plus, donors will see some money recouped via tax relief on pension contributions — satisfying for those peeved by paying extra income tax in an attempt to run down their pensions faster. Since the child or grandchild won’t be able to access the money until they are at least 57, it at least reduces the fear the money will be squandered on fast living.
“It’s a win-win from a tax perspective on both sides of the generational equation,” says Charlotte Ransom, chief executive of Netwealth, a wealth manager. “It can generate very meaningful, long-term value with efficient compounded returns and avoids the risk of the money being spent unwisely during younger years.”
James Baxter, founder of Tideway Wealth, says: “We have several early 30-year-olds who already have around £100,000 in both an Isa and a Sipp funded entirely by their parents. These were accumulated in their early careers when they were not earning that much and it would have been impossible to save much on their own.”
So, with just under 10 weeks to go until Christmas, Gen Z know what to say when they get asked what present they’d like under the tree: a slug of money in their pension.
Moira O’Neill is a freelance money and investment writer. Email: moira.o’neill@ft.com, X: @MoiraONeill, Instagram @MoiraOnMoney