If it is a truth, universally acknowledged, that we have been living in a golden age of retirement, it must also be the case that the golden age will end. Does 2017 mark the tipping point?
Pensioners today are nearly three times better off than their parents according to the latest ONS report, which looks at what has happened to the income of retired households in the UK over the past 40 years. Few expect this to continue indefinitely. There are a number of signs that things are changing, from the recent news that a rise in state pension age is being brought forward by seven years, to companies’ moves to provide defined contribution, instead of defined benefit, pensions. When you couple this with economic uncertainty and rising house prices, the younger generation is looking out over a very different retirement landscape.
By 2025, millennials will account for around 75 per cent of the global workforce. This “digital first” generation is in the early-to-mid phase of “creating” their wealth with only three per cent expecting to have stopped working upon reaching state pension age. They are expected to face greater financial challenges than previous generations and yet they appear to be worryingly ill-prepared.
Recent research from Aegon revealed that more than half of those aged 18-30 are actively reducing their monthly savings to help with the increased cost of day-to-day living. While this may seem like a rational choice in the short term, it has a significant impact on their long-term saving potential. Rising inflation means that millennials are far more likely to be diverting money away from savings, not just for retirement, but also more near term goals such as buying a house. All this, while also tackling the long term difficulties of paying off extortionate student loans, and navigating an uncertain (and possibly, multiple or zero hour) job market.
Some positive saving steps are being made. The introduction of auto-enrolment has seen the greatest increase in private sector pension participation for people aged between 22 and 29. That being said, research from YouGov shows there’s still work to be done. Four in 10 millennials still have no pension provision at all, and 27 per cent admit to not understanding enough about pensions. We also have the challenges offered by the gig economy, much of which is dominated by millennials, according to the Taylor report, and which operates outside the boundaries of auto-enrolment. As this sector grows, more and more people could find themselves without the benefits of a workplace pension.
Many young people lack the finance, or the awareness, to seek financial advice. However, they are attracted to online tools and financial apps which enable them to educate themselves and set their own short and long-term savings goals.
They are getting into a habit of accessing and analysing their financial data and are attracted to a system that would give them a holistic view – in a similar way to the proposed Pensions Dashboard. This is hugely positive, but it has to come with better education about what the numbers mean, and what the implications of choices made can be on their long term future. Financial education, in schools and workplaces, has never been more important.
The long term savings conundrum is complicated further by increasing life expectancy and medical innovation continuing to push boundaries. While retirement seems a very long way off for most millennials, the reality is that they are likely to need a retirement pot that can sustain them through many years. So they must think long term, as well as about those immediate priorities that can feel so much more important.
While these challenges seem significant, they are certainly not insurmountable. Employers have a key role to play in making sure that their entire workforce is thinking about their long term financial plan – not just those approaching retirement.
There is huge scope for financial service organisations, such as advice and financial planning sectors, to grow by tapping into this digitally literate demographic, and engaging earlier with potential future clients.
With challenges come opportunities. As millennials progress up the income scale, they will become more eager to invest and save. To harness this growing cohort, businesses and advisers alike need to highlight how radically the pensions world has changed since those currently in retirement began saving, emphasising that millennials are not on track to receive guaranteed pots.
Bridging this knowledge gap and suggesting realistic expectations will arm millennials with the tools to make informed retirement saving decisions. If the industry and government fail to take responsibility for future retirees they will be paving the way to a generation of pensioners in poverty.