Millennials may think they can rely on a substantial inheritance to fund their later years. But this could be risky
With increased life expectancy, increasing use of equity release among older homeowners and higher care fees, the probability of millennials receiving an inheritance are decreasing.
Instead of betting on family wealth to fund their retirement, the younger generation should start a savings plan in their 20s, several pension experts suggest.
According to research from Royal London conducted last year, less than a third of individuals aged between 25 and 44 have grandparents living in owner-occupied accommodation and parents who might pass on any inherited wealth.
Sir Steve Webb, director of policy at the mutual insurer, argues it is “very risky for someone in their 30s to put off saving for a pension in the hope that they will inherit housing wealth just before they retire, as the timing and amount of any inheritance is highly uncertain”.
Peter Bradshaw, director of investment and planning software firm Selectapension, also shares this opinion, pointing out that even in the case of receiving an inheritance, the average age for this will be 61 for millennials, research from The Resolution Foundation shows, “with many waiting even longer”.
He argues that although life expectancy rates are currently stalling, the increase in the past few years means that “older generations are still set to live far longer than previous ones”.
Mr Bradshaw explains: “However, as their future health cannot be predicted, their savings could be significantly reduced due to long-term health or care costs.”
Mr Webb adds that another risk of waiting for an inheritance, in addition to later life care costs, is the use of equity release, which “can mean a parent has very little housing wealth left to pass on”.
He says: “In planning your own retirement it is better to regard an inheritance as a welcome windfall rather than a central part of retirement planning.”
“The most efficient way to build up a reasonable retirement fund is simply to start saving early and keep saving for as long as possible.” — Fiona Tait, Intelligent Pensions
Martin Bamford, chartered financial planner and managing director at Informed Choice, argues that an inheritance isn’t always considered in financial planning.
“Many of the families we work with run financial plans which are designed to make their money last for their life, but with little contingency for leaving a sizeable inheritance when they die,” he notes.
“Instead, parents increasingly want to make modest lifetime gifts they can witness their children and grandchildren enjoy.”
All experts agree the safest way is for millennials to assume they will have to fund their own retirement, as Fiona Tait, technical director at Intelligent Pensions, points out.
She notes, however, that unfortunately there isn’t an easy option.
“The most efficient way to build up a reasonable retirement fund is simply to start saving early and keep saving for as long as possible,” she explains.
“Affording the payments is not easy when you have a student loan and want to be able to enjoy nights out or trips abroad but, believe me, it will only get harder the later you leave it.”
According to figures from Royal London, it would cost an individual in their mid-20s around £370 per month to retire on two-thirds of their final salary, whereas someone starting in their mid-30s would have to save £550 to achieve the same result, and someone in their 40s would have to put aside £900 per month.
With the introduction of auto-enrolment in 2012, workers are now putting 2 per cent of their salary in a pension, with the employer contributing 3 per cent.
Malcolm McLean, senior consultant at Barnett Waddingham, suggests that opting out of a workplace pension arrangement is “effectively the equivalent of turning down ‘free money’ or extra wages”.
He argues this option should only be considered as a last resort – for example, when an individual is “drowning in post-student debt and/or needs to raise money urgently in the short term to stave off eviction from their home or lodgings”.
Another reason to start saving as early as possible is due to how compound interest works, which could even match a final salary pension scheme, he notes.
“Technology offers a great way to help bridge the knowledge gap among young people and allows them to plan on-the-go.” — Peter Bradshaw, Selectapension
“The sooner they start and the more they pay in, the better their pension will be,” Mr McLean confirms.
“Given the length of time they will be contributing, it could well be with the benefit of decent investment returns, that their defined contribution pension plan could eventually match or even exceed what a defined benefit scheme might have given them.”
Selectapension’s Mr Bradshaw also agrees that starting to save at the beginning of an individual’s career is crucial if they want a bigger income.
He also suggests millennials should calculate their weekly spending.
“The state pension currently pays out £164.35 at most per week; this is unlikely to cover everyday living expenses for most,” he observes.
Another tip for the younger generation is to top up their pension contributions as they climb the career ladder.
Mr Bradshaw says: “You may only be able to set aside a few pounds as you start your career. However, as your salary increases, remember to increase your pension contributions by the same percentage.”
“It will make a big difference to your pension pot later down the line.”
Mr Bradshaw also advises millennials to use tech to school themselves on retirement costs.
“Technology offers a great way to help bridge the knowledge gap among young people and allows them to plan on-the-go,” he acknowledges.
“For example, tools like Pension Monster offer online guidance to help young people understand their retirement options, plan realistic goals and show how much saving is needed to meet them.”
Finally, after setting a financial plan, savers should “make sure to review it regularly and budget accordingly”.
He says: “Annual statements and projections are available for all pension plans, making it easier to monitor your savings and view how they are performing.”
Maria Espadhina is senior reporter for FTAdviser