With the current state of pension savings, 41% of 20-40 years old will have insufficient funds to meet basic standards of income by their retirement, recent research from Hymans Robertson shows. According to the firm, older generations should encourage younger generations to “get into the savings habit early” to prevent them from lacking funds to meet minimum level of pension income.
In its analysis, pensions, benefits and risk consulting firm Hymans Robertson looked at the contribution level made by those between 20 and 40 years old, working for blue chip companies, into their pension pots. From its data, it became clear that 41% of those enrolled are currently not saving sufficiently for them to meet the minimum level of pension income. The research identified the rate required to meet minimum needs to be 15% of total income, however, the average employee in the 41% category is only saving 6%.
While the current system of auto-enrolment in pension schemes appears to be working, with 90% using the scheme and only 10% opting out, the auto-enrolment savings level of 8% is well below the minimum required according to analysis by the Pension Commission. With employees seemingly reluctant to engage with their future financial stability and make changes to be above the auto-enrolment level, the firm notes that it is wait and see if a more favourable rate is introduced in 2017, when the auto-enrolment rate is expected to be changed.
There are further potentially favourable changes expected within the tax code around pension schemes effective in April. It will be possible for those 55 and over to draw on their retirement savings, with the first 25% tax free. These changes, Hymans Robertson notes, may change the incentive to pay into pension pots at a higher rate for young people, as a means of saving with limited tax liability. This is especially true if there is a £ for £ employer matching scheme, which allows for employees to draw the matched income as 100% tax efficient long term saving.
While saving for pensions is inherently important for the long term financial outlook of person, the consultancy notes situations in which paying off debt or parking money in an ISA savings account is more practical. With high interest rate debt, particularly payday loans, a more rational move than saving is to pay it off as quickly as possible. If flexibility or access to finances is important, placing £15,000 (the tax free limit) in an ISA account leaves it outside the hands of the HMRC, but ready to hand.
Concluding, Paul Waters, Partner at Hymans Robertson, says: “It’s important that older generations encourage their younger family members to get into the savings habit early, helping them set up savings accounts such as pensions or ISAs as soon as possible. Employer facilitated savings vehicles such as DC pensions are typically the most effective starting point and should be used to their full advantage.”