What should industry know about tomorrow’s pensioners?

However, today’s younger savers have different characteristics, and the system will need adjustment to ensure savers have a good opportunity to achieve an adequate retirement income. Five key characteristics will help people to live a fulfilling, longer life: resilience, agility, wellness, financial capability and flexibility.

Alongside auto-enrolment, and private pensions market shifts, four main areas will affect future outcomes: employment, housing, social and family relationships, and health.

Employment is correlated with pension income. Those with full working lives, who contribute at higher-than-average levels (at least 15 per cent or above) to private pensions while in work, have a good chance of achieving an adequate income in retirement, replicating working-life living standards.

In order to be prepared for income shocks and variable needs, today’s savers will need to contribute at higher than current levels

Working lives are changing

However, working lives are becoming increasingly heterogeneous as levels of casual and self-employment increase and people change jobs more frequently. Unemployment and increases in indebtedness arising from Covid-19 have exacerbated the difficulties many younger people face.

A combination of support and guidance with decision-making, policy changes that mean government and employers make more contributions on behalf of lower earners, and products that enable variations in contribution levels as employment circumstances change could help younger people to be more agile, flexible and resilient with work and savings, and build financial capability to help people prepare for retirement.

Changes in home ownership levels are affecting future retirement prospects. Home ownership dramatically reduces living costs (as tenant pensioners spend on average 36-39 per cent of income on rent), increases security and provides an additional retirement income source through equity release. 

As a result of economic problems resulting in lower incomes and higher house prices, home ownership across England has fallen from 71 per cent in 2003 to 65 per cent in 2019-20. Younger people are particularly affected by these trends.

Young people who struggle to purchase a house could benefit from a promotion of products designed to make house purchase more affordable: for example, lifetime Isas, savings sidecars and rent-to-buy schemes, which can be flexibly combined with pension saving.

However, there is still likely to be a significant proportion of renters in future. Pensioners who claim housing benefit and have private pension savings may see their retirement income reduced, as housing benefit is means tested.

If benefit changes were made, for example, disregarding private pensions from the housing benefit means test, renters would find it easier to achieve adequate incomes.

Current trends indicate that future pensioners are more likely to spend some pension savings on supporting younger family members and to be single at some point.

Changes to demographics also mean people will be living for longer on average, with potentially longer time requiring care. There will be fewer people in younger generations to support older family members, resulting in an increased number of older carers and an increased need for funding to spend on care. 

Flexible approach to savings needed

In order to be prepared for income shocks and variable needs, today’s savers will need to contribute at higher than current levels and/or have access in retirement to either a very high income or a product that combines liquid funds and an income.

Alternative saving products (such as Isas and pensions sidecars) may help future pensioners to manage unpredictable costs, with adaptation by the state in terms of how benefits to older carers are structured.

A flexible approach to saving and the use of savings, alongside a focus on financial, physical and mental wellness, could help reduce the potential negative impact of changes in needs and family circumstances.

While the picture may seem worrying for today’s younger savers, there is still time for adaptations to policy and practice, which could help ensure that tomorrow’s pensioners have a better chance at achieving an adequate retirement income.

Daniela Silcock is head of policy research at the Pensions Policy Institute