Pensions warning for Generation X

As Covid disrupts pension saving for millions of workers, one generation in particular may see its best-laid retirement plans going awry. But are these latest findings just another reminder than we should all be trying harder to save for old age? Article by Nick Green.

Ask not for whom the pension bell tolls – apparently, it tolls for thee. Sometimes, it seems quicker to list the people who are not hearing alarms ringing over their pensions. Gen-Xers – that is, those born between 1965 and 1980 – are the latest demographic facing a shortfall in retirement income, following findings that Covid has left self-employed people particularly vulnerable in this area, and that women lag behind men in pension saving. This group, some of whom may have already been on the cusp of early retirement, may be forced to make late adjustments to their pension saving plans if they want to enjoy the lifestyle they hope for in later life.

These latest ominous pronouncements come from the International Longevity Centre-UK (ILC), in a report published in partnership with the Phoenix Group, the insurance provider. Their research indicates that a fifth of Gen-Xers are now either saving less into their pensions, or have already started to access them. Pension pots can be accessed from the age of 55, and the oldest in this generation are now 56, so a few are now in a position to do so.

For some Gen-Xers, accessing their pensions at 55 and retiring early (or gradually) may have always been the plan. The ILC’s research, however, uncovers something more worrying. If the Covid pandemic has forced some of these individuals to dip into their pension pots just to supplement their lost income, then this could affect their whole retirement plan.

The implications of accessing a pension early are often more problematic than many think. It isn’t just a matter of having to make a pot of money last longer (though that is a big part of it). If you also stop contributing to your pension at this time, then you are saving less overall – missing out on perhaps 10 or more extra years of contributions. It is possible to continue paying into a pension after you start to access it (you might do this, for example, if your income is irregular) but this comes with another sting in the tail. Accessing your pension reduces the maximum amount you can pay in from £40,000 a year to £4,000 a year. In short, once you start drawing a pension, it becomes up to ten times harder to build it up again.

How Generation X missed two pension boats

The ILC report ‘Slipping between the cracks’ also finds that a third of Gen-Xers face a serious risk of having insufficient retirement income, and that half are either ‘Fairly worried’ or ‘Very worried’ that they won’t achieve the lifestyle they want in retirement. Generally they also expect to be worse off than their parents were in retirement, rather than better off – though this may be due to a slightly rose-tinted view of the past. As one individual interviewed for the report put it, ‘… most people were prepared well for retirement in earlier generations…you went to work, you had a stable job, and you continued in it. And at the end of it, you just popped out with a pension. You didn’t even think about it.’

This cosy idea – that people in the past didn’t have to think about how they would live in retirement – may be one of the reasons why people are a bit shocked that they have to think about it now. That said, despite having certain advantages over both the Millennials after them and the Baby Boomers before them, Gen-Xers do face their own particular drawbacks too.

For instance, many entered the job market just as the more generous and dependable final salary pensions were being withdrawn by most private sector employers. But they also started work before auto-enrolment in workplace pensions was introduced in 2012. Although they benefit from it now, this means that Gen-Xers may have worked up for between 14 and 29 years of their career without a workplace pension. As another interviewee in the report admits, ‘I’m not sure [my pension] will be adequate, as I didn’t make much provision until I was in my late thirties.’ This is clearly what the ILC means by this generation ‘slipping between the cracks’.

‘I want my LTV’ – is property the answer?

Another problem Gen-Xers face may be cultural – the fact that pensions have never been waved in their face as they have been with Millennials. A contributor ruefully noted, ‘In our culture the mortgage seems to trump any other kind of saving, whereas the pension is what many need to be thinking about too. So many seem to think their house, their property will be their nest egg.’ Another said, ‘I know so many people that are dependent on property, but that is risky.’

Those who grew up in the eighties may naturally associate property with booming wealth, and may therefore be more likely to consider it as a good retirement investment. By contrast, if their parents had generous final salary pensions, they may have thought of pensions as something that ‘just happen’. The MTV generation may understand LTV (loan-to-value), but still struggles to get its head around DB versus DC (the two very different types of pension).

On top of this, there’s also the problem that every generation faces: the reluctance to accept the fact that one is no longer in the first flush of youth. Around one in ten of those surveyed by ILC considered that retirement was too far away to think about, represented best by the one who remarked, ‘I’m a long way from retirement.’ The youngest of these individuals is 41, meaning retirement is about the same distance from them as their 18th birthday. For the oldest, who are over 55, retirement is already visible on the horizon. And the fact remains that retirement saving, by its very nature, takes a long time – so being ‘a long way from retirement’ is the best time to think seriously about it and take action.

Solutions for people struggling with pension saving

Sophia Dimitriadis, research fellow at the ILC, observed that the pandemic has thrown the plans of many Gen-Xers into disarray. She said, ‘Lots of people [are] having to dip into their pension pots to make do in the short term.’ She went on to explain that the obvious remedy for this generation – working for longer and retiring later – has also been put in doubt. ‘Working longer simply won’t work for all. And we know that especially following the pandemic, lots of people could face long-term unemployment or even early retirement forced upon them when they can least afford it.’

The ILC has called for government intervention to help this generation to meet its savings shortfall, but realistically it is safer to assume that on this occasion, the cavalry is not coming. Generation X is far from being the only group facing a pensions shortfall, and the prudent approach should be that if you want something done, you must do it yourself.

The first step is accepting that although pension saving might not be easy, it is necessary. The second step is understanding that, actually, it may be easier than you think. For example, someone aged 45 with no pension at all could save up enough pension for an income of around £5,000 a year by the age of 65 (based on a salary of £30,000 and minimum contributions). Of course this isn’t much, but added to the state pension of around £9,000 per year, it could make all the difference.

Furthermore, even a small increase in contributions can make a significant difference to eventual retirement income. In the example above, increasing contributions by just 1% at that late stage could still increase retirement income to around £6,000 a year, while 2% could raise it nearer £7,000. If the employer were to match this 2% increase, income rises to over £8,000. These figures are from the Unbiased Pension Calculator, which makes certain assumptions about pot growth (so should not be seen as firm predictions), but it is an encouraging illustration of how quickly savings can build up, provided you start them soon enough and keep paying into them regularly. The huge boost that comes from 20% tax relief on each contribution gives pensions more growth potential than almost any other investment in the same risk category – including property.

At a time when it may be hard to make ends meet, it is tempting to think of pensions as non-essential spending – something that can be put off till later. But later is exactly when you’ll need them, and essential spending is what they will be there for. Saving into a pension is probably the only chance you’ll ever get to buy £100 for £80 (thanks to tax relief) on a regular basis, and then add compound interest on top of that. When you think about it in those terms, it can be a much more tempting prospect.

If you don’t have a workplace pension and want to set up your own personal pension, talk to a financial adviser about the best options for you.