Only 39% of young savers confident about retirement prospects

Only 39 per cent of people aged 25-34 are confident their retirement savings are on track, according to BlackRock’s latest annual DC Pulse survey.

The survey, which polled 1,000 UK adults saving in workplace pensions, found that people aged between 25-34 are more likely to prioritise saving for a “rainy day” fund (71 per cent) over paying into their nest egg (52 per cent).

We cannot assume that most people just choose not to save more for their future – for many it is not a choice. For most they need the money now; today and tomorrow

Mark Futcher, Barnett Waddingham

Fifty-two per cent spend money on day-to-day “treats”, which they do not need and cannot really afford. Income is not a deciding factor either, as when asked what they would do with an extra £200 a month, only 2 per cent said they would pay it into their pension. 

A false sense of security

According to the survey, almost half of 25-34 year olds believe they and their employer should ideally contribute 15 per cent or more into their defined contribution pension. In reality, less than a third of those polled are currently doing so.

Claire Felgate, head of UK DC at BlackRock, said the government’s move to increase the minimum total contribution rate for auto-enrolment to 8 per cent from April 2019 is a step in the right direction.

However, “our concern is that individuals will think the number is ‘enough’. We need to start thinking of 15 per cent as the ‘rule of thumb’ to help everyone secure a comfortable living in their old age”, she said.

Forty-four per cent of those aged 25-34 admitted to putting off saving or investing for long-term things like retirement as it “seems silly to focus on something so far away”.

Kate Smith, head of pensions at Aegon, highlighted that there are many conflicting priorities to save towards when people are young “that the focus is often on the here and now, and allocating money towards retirement isn’t top of the list”.

“As a general rule of thumb, young savers realistically need to save an average of 15 per cent of their earnings over their working lifetime,” she said.

Affordability affects ability to save

However, Mark Futcher, head of workplace wealth at consultancy Barnett Waddingham, is against any rules of thumb: “While they are helpful to quantify the magnitude of problems, they are generic, and with respect to pension planning can lead people to make wrong decisions for their more immediate needs.”

He added: “We cannot assume that most people just choose not to save more for their future – for many it is not a choice. For most they need the money now; today and tomorrow.”

It is also important to recognise debt issues that can quickly create a spiral of financial problems, Futcher said.

Alistair McQueen, head of savings and retirement at Aviva, noted that young people have driven a greater increase in workplace pension participation since 2012 than among any other age group, “despite unprecedented pressures flatlining wages, student debts, skyrocketing house prices”.

However, he added that being ‘in’ is not by itself enough: “A minimum of 12.5 per cent of earnings by 2028” is more realistic than 2019’s 8 per cent.

Educate savers

Aegon’s Smith pointed to the value of auto-escalation and financial education. “The harsh reality is that as people live longer and need to account for gaps in their working lives, they need to save more. One way of achieving this is through auto escalation, although we’re unlikely to see legislation for this in the near future.”

She said that employers can also help by introducing alternative ways to save more for tomorrow, by encouraging employees to sign up to increased contributions at planned stages in their career or when they get a pay rise or promotion, according to Smith.

Jon Parker, director of DC and financial well-being consulting at Redington, stressed the need for better education: “It is critical that people have a good grasp of important financial subjects like budgeting, debt, compound interest and how great a savings vehicle like a workplace pension can be with so much ‘free money’ available from employers and the taxman.”

He added that embedding this knowledge at a young age can make a huge difference throughout life.