Getting the so-called Generation X to save more into their pensions, at a time when they might be most financially stretched, is a challenge, Laura Hughes writes.
Research shows the generation currently in their 30s and 40s is the most financially ill-prepared for retirement in the UK.
While those in their 50s had the advantage of the last final-salary pension schemes and millennials have benefitted from auto-enrolment, there is a lost generation for whom other financial pressures mean pension provision is often not a priority.
However, it is at this age that making contributions – and benefitting from the effects of compound interest – is crucially important.
Recent findings from Aegon demonstrates that, in normal market conditions, the value of a pension is initially mainly driven by contributions, before switching to investment return as the individual nears retirement.
It is, therefore, not easy to make up lost ground by ploughing money into a pension in the decade before retirement.
Worryingly, in its recent Readiness Report, Aegon showed that as many as one in seven people are approaching retirement with no pension savings at all, while men have three times as much put away as women.
By just making small incremental increases in the amount you are putting into your pension, it will make a huge difference to the final amount. – Jamie Clark, Royal London
Aegon’s head of pensions Kate Smith says: “It has undoubtedly been a challenging time for many people, with stagnant wages and many people stuck in the ‘gig economy’.
“Women, in particular, often suffer from having missing years in their pension contributions or moving into lower paid or part-time work in order to balance family commitments.
“There are real opportunities now with the workplace pension and I think, coupled with people taking greater personal responsibility, there is the possibility for a much more positive outcomes in pension provision.”
Ms Smith urges people not to opt out of the workplace pension and, instead to focus on maximising the employer contribution.
Meanwhile, Jamie Clark, senior business development manager at Royal London encourages everyone to have a better understanding of their current pension provision, using tools to see how their needs in retirement will be matched by the likely outcome of their current savings.
“We have a calculator tool on our website that shows the impact of increasing savings by as little as £5 per month,” he says.
“While the subject of pension savings can seem overwhelming, by just making small incremental increases in the amount you are putting into your pension, it will make a huge difference to the final amount which will, after all, make retirement more comfortable.”
John Lawson, head of financial research at Aviva, points to the fact that prior to auto-enrolment, three out of five people opted out of their workplace pension, necessitating significantly higher levels of savings now.
Another area we look at for professions like teachers or engineers is claiming back professional subscriptions from HMRC and putting that rebate into a pension. --- Calvin Husbands
However, with 25-30 years still to go before retirement, there is potential to improve the outlook, particularly by capitalising on a number of “easy wins” around the areas of tax relief and employer contributions.
“In some cases employers will state that they will increase the amount they will match from, say, 4 per cent to 8 per cent. Many people miss that trick and, in effect, give up a free pay rise,” Mr Lawson says.
“It is also worth looking at the additional benefits you might get from your pension scheme, such as free life cover, which is particularly important for people in this age bracket with dependents.
“By implementing basic financial budgeting and shopping around for things like insurance and utilities, it is also possible to free up money that can be easily be put into your pension without you ever missing it.”
Attention to detail
Meanwhile, Calvin Husbands, a chartered financial planner at Bolton-based Heavenly Finances, shows how attention to detail can marry up tax savings and benefits with pension contributions.
He cites the example of those moving from basic-rate to higher-rate earnings diverting the pay rise into a pension, which offers a sizeable tax saving while bolstering the pension pot.
“Similarly, by putting money into a pension, people may be able to retain child benefit or keep their full entitlement for childcare vouchers, which halves when you move into the higher-rate band,” Mr Husbands adds.
“Another area we look at for professions like teachers or engineers is claiming back professional subscriptions from HMRC and putting that rebate into a pension.
“Additionally, often individuals with long-standing personal pensions may have moved into the higher-rate band but may not have claimed the higher-rate tax relief they are entitled to. This too can make a considerable difference to the overall pension pot.”
While there are ways in which an individual can quite easily increase their pension provision, Dean Mullaly, managing director at London-based Mark Dean Wealth Management, believes the problem facing the industry is more deep-rooted. He states the need for greater simplification and a degree of rebranding.
“There is still a fundamental misunderstanding in the UK of the difference between ‘tax relief’ and ‘tax free’. The government could help more by simplifying the message and the tax rules”, Mr Mullaly says.
He adds: “Everyone seems to think an Isa is a good thing because it is ‘tax free’, but they do not really understand what part is tax free and what ‘tax free’ actually means.
“We have been conditioned to think it is a good thing, while we have been made to think pensions are a bad thing because of negative stories of scandals and people losing their money or them simply being too complicated to understand.
“Perhaps we should stop calling them pensions and start calling them ‘Retirement Isas’, where for every £100 you put in, the government will add a further £30 instant bonus, which sound a bit more enticing than ‘tax relief’.”
Laura Hughes (nee Mossman) is a freelance financial journalist