Why the Pensions Knowledge Gap Matters

The millennial generation, roughly born between the ’80s and 2000s is typically the age that tends to be unwilling to engage with longer-term savings goals and instead, splashing out on “luxuries” such as entertainment subscriptions and eating out. Beyond this, 18-40-year-olds in England in particular, are amongst the most indebted people in Europe, with large student loans and mortgages (together) in excess of a quarter of a million pounds, according to a 2018 study by the Guardian.

In addition to the above, it is commonly known that the millennial generations (and beyond) typically will have many different jobs in their lifetime. The survey found that the average British worker will have 6 jobs in their lifetime. When compared to millennials between 18-35, the figure doubles to 12.5 throughout their working lives.

Because of the frequent job hopping, coupled with the introduction of Auto-Enrolment in 2018, means that millennials will typically build up a variety of smaller pension pots over their working life, and will not truly value the benefits of saving towards early retirement. The Pensions Policy Institute found that auto-enrolment has almost doubled the participation of 22-29 year olds regularly saving into pensions.

Now let’s be honest, talking to younger people about pensions pretty much makes you the most unpopular guy at the party. However, there is great wisdom in being proactive with your longer-term savings from the get-go, and this is what we will spend some time investigating why.

Let us start from the very beginning. A private pension is broadly described as a pension scheme arranged either by yourself or by your employer that is designed to supplement the amount you will receive as a state pension. The State Pension we recognise today is designed on a pay-as-you-go basis, meaning the National Insurance Contributions you pay now from your gross pay, funds those who are in receipt of the state pension. Currently, you need to pay NICs for 35 years to receive a full state pension.

Most private pensions are what we call defined contribution schemes, where you and your employer (if employed), will give an agreed percentage of your salary into a pensions scheme. These contributions are given on a monthly basis and receive tax relief from HMRC at your marginal tax rate. As a basic rate taxpayer, this means for every £100 net you put in your pension, it will be topped up by £25 by the government and then invested for your retirement.

Despite millennials and Gen Z being the highest proportion of society that is in zero-hours jobs, almost 7/10 are saving into a pension, according to The Pensions Regulator. Beyond this, only one in four millennials admit they do not currently have a pension scheme or are unaware of their scheme benefits. The most cited reason for this is that many are paying off debt, and wish to service this before they start putting money aside for their retirement.

In addition to this, current pension legislation allows you to make a maximum contribution of the greater of two amounts: an annual allowance capped at £40,000 or 100% of your UK-relevant earnings. If your income exceeds this amount, and you are a higher or additional rate taxpayer, then you are permitted to backdate your unused annual allowance for up to three previous tax years. Again, this is subject to the annual allowance not exceeding 100% of your relevant earnings.

The best way to supercharge your retirement pot is to always check with your employer about the possibility of further matching. Quite often, companies will do the statutory minimum, but many will match your contributions up to a fixed amount. Also, for those in receipt of additional income, you can make ad-hoc lump sums and regular contributions into your pension plans, and receive the tax relief at source, as normal.

Why aren’t millennials engaged with pensions?

This is a multi-faceted issue and should be observed from a number of viewpoints. For most people, let alone millennials, the pensions landscape is a confusing one. Despite the government’s successive attempts to simplify pension regulation and encourage savings towards retirement, there remains a sizeable detachment from what people perceive, and what is reality.

Currently, pension legislation will enable you to draw up to £500, three times in your lifetime directly from your pension pot, tax-free, to obtain advice about your pensions. This could allow individuals to tailor their pension provisions to their objectives, or even to put down their retirement objectives in the first place.

Another explanation for low engagement within the pension landscape is the reality that many individuals are intimidated or feel daunted by the amount they may need to save to live in a comfortable retirement.

A good methodology for working out a rough income required is to use a 4% return basis net of any charges/fees. So, if you need £16,000 a year in income, you can expect to need around £400,000 in your pension pot to provide this sustainably. If an income of £31,000 is required at retirement for your golden years (equivalent to the 2022 UK median salary), then you will require approximately £775,000 in a pension pot. This may be a difficult figure to attain for the

typical job holder, so many people immediately accept the fact they may have to work right up until they receive their State Pension, currently at 67.

The Social Market Foundation has also gauged that the average person today seeking retirement has around a £240,000 pension shortfall, or put into more general terms, an average underfunding rate of a whopping 58%.

What can be done to remedy the lack of engagement?

To begin on a positive note, Gen Z’s, or Zoomers as they are known (aged 10-25) are perfectly poised to become one of the best-equipped of all the generations to ‘walk the walk’ when it comes to pension planning.

As we have already eluded to, people within this age range who are in work, would all have benefitted from the auto-enrolments rules from the age of 16 if they are in employed work. It must be noted, however, that ‘non-eligible jobholders’ for individuals between the age of 16 and 21 and earning under £10,000, will have to inform their employer they would like to be enrolled within the pension scheme.

As Gen Z are the newest generation of adults and adolescents, most will have a scarce memory of the pre-internet world. On average, the typical Gen Z will be far more ‘plugged-in’ than their parents, meaning they are always informed primarily by internet-enabled technology and have the highest average online usage on a day-to-day basis, with Statista recording 97% of Gen Z using social networking apps on a daily basis.

Generally, Zoomers are on the right track when it comes to retirement. By automatically sacrificing some of your salary into a pension during your twenties, it will create the best environment for retirement funds to build up substantial capital growth. With the benefit of compound interest (check out our free calculator here!) over the next 40 years, you will create a solid foundation that allows for a more modest yet comfortable retirement.

Millennials and Gen Z are the first generations that are acutely aware that state provision alone is not adequate for retirement planning, and that steps must be taken now to encourage some onus on this individual to save for one’s retirement. And what’s more, as an individual that is teetering between Millennial and Gen Z, I think we’re doing alright…