Millennials and Gen Z beware: People in their fifties have serious pension problems. You could be doomed

People in their forties and fifties aren’t saving enough for a comfortable retirement, according to new research. So where does that leave younger generations who are worst hit by the cost of living crisis, asks Katie Rosseinsky?

For many young people, saving for retirement is easy to treat as a problem for another day (iStock)

Whenever a letter arrives emblazoned with the logo of my pension provider, I feel wracked with anxiety, promise myself I’ll read it later… then shove it in the nearest drawer and forget all about it. I can’t be the only person who’s guilty of doing so. Unless you’re very au fait with your personal finances, this piece of life admin tends to be one part boredom, two parts confusion.But writing off our retirement plans as tomorrow’s problem might mean we’re making an already tricky situation worse for ourselves.

Earlier this week, a report from the think tank Phoenix Insights found that people in their forties and fifties are not saving enough and will have “a nasty shock” when they reach retirement, with just one in seven putting aside enough to avoid a drop in their living standards. But if Gen-Xers, generally considered to be more comfortable financially, are facing a gloomy picture, what is the outlook like for younger generations – the ones who are now bearing the brunt of the cost of living crisis and a shocking property market? And is there anything that they can do to ameliorate it – other than bracing themselves for clocking in for work on Teams or Slack (or whatever equivalent we’re using by then) in their seventies and beyond?

In the UK, if you have worked for a certain period of time, you’re entitled to some level of state pension (exactly how much you receive depends on how many years you have paid National Insurance). But “we’ve no idea what the state pension might look like in 40 to 50 years time for those currently in their twenties and thirties”, says Ross Leckridge, a chartered financial planner at Aberdein Considine. The age for eligibility might well increase even further (it’s currently set at 66 but will increase in two years’ time). And, Leckridge notes, there’s also the question of “will it be worth less, in real terms, than it is now?” Our state pension is already considered less generous than many other developed countries. The maximum amount currently works out at £221.20 a week – that’s around £11,500 a year.

Most people increase their retirement income with a workplace pension – but the schemes many of us are paying into are different from the ones that might have cushioned our grandparents’ retirement. Previously, most policies promised a specific salary during your retirement (based on your earnings before you stopped working), but that’s no longer the case. Now, it’s more common to accumulate funds for your pension throughout your career: you and your employer pay in money during your working life. The former option would guarantee an income for life; the latter depends on how much you put in, and how the investment performs. This change has shifted the onus for sorting out retirement onto the employee. As Leckridge puts it: “New generations of pensioners will need to take responsibility for managing their own pensions throughout their retirement to make sure they don’t run out.”

Young people will have benefited from automatic pension enrolment for much of their working lives. This was introduced in 2012, and means that anyone aged 22 and over with an annual salary of at least £10,000 will join their workplace pension scheme by default. But as the cost of living has skyrocketed over the past couple of years, it’s hardly a surprise that many simply don’t see their pension as a priority: instead, those on an entry-level salary need every last pound of their wages (and paying, say, a tenner a month into a pension pot feels a bit futile).

If you’re struggling to pay your rent and cover your energy bills right now, then it’s only natural to view saving for retirement as a problem for another day (or even another decade). In 2023, a study by pensions and investment company Royal London found that nearly half (49 per cent) of those aged 18 to 34 had looked into reducing or pausing their pension in the previous two years. And recent research from data science company Outra found that the number of thirtysomethings who have paused contributions has increased by 5 per cent in the last year, with the total standing at 1.43 million.

Compound interest means the money you put aside at the start of your career is really important (iStock)

Even though you might be on a much lower salary when you’re young ... those early pounds that you save are worth an awful lot

Pete Glancy, Scottish Widows

The cruel irony, though, is that although it might be harder to save at this early point in your career, the money you do put aside then is seriously important. That’s thanks to compound interest, when you earn interest on the interest that you’ve already earned – this might ring a distant bell from your GCSE Maths revision. “A pound that you save towards your retirement in your twenties has four times the buying power of a pound that you save in your fifties, and that’s because of all the compound investment growth over four decades,” explains Pete Glancy, head of pensions policy at Scottish Widows. “It really turbocharges the value of that pound. So even though you might be on a much lower salary when you’re young compared to later in your career, those early pounds that you save are worth an awful lot.” 

Want to see exactly how “turbocharged” that growth can be? Leckridge has an example. “A 40-year-old saving £200 a month into a pension that is growing at four per cent a year will accumulate a fund of £74,326 by the age of 60,” he says. “A 20-year-old doing exactly the same thing will accumulate a fund of £237,184.” Or, to look at it from a different angle, “a 40-year-old would have to save £646.68 a month to accumulate the same pension fund of £237,184 as a 20 year old saving £200 a month”. Starting to save later, then, just puts far more pressure on you later in life. Suddenly I start wondering exactly where I stashed all those envelopes containing details of pension policies from my first jobs. I’d always assumed that because I hadn’t paid in much, thanks to low salaries, these were pretty pointless – but it seems I was wrong. Wouldn’t it be helpful if employers spelt this out to their younger staff?

If you are in a position to start saving, getting out of the hellish cycle of renting and buying a place of your own may well seem like more of a priority than pensions. But your housing situation will impact your retirement, too. “Because house prices have been rising so significantly in the last couple of decades, people are having to save up until much later in life to build up these really big deposits that are required,” says Glancy. So if you do end up owning a home, you might be paying off your mortgage into your sixties and seventies.

Between those later-in-life mortgages and older renters, the assumption that someone’s outgoings will decrease in later life no longer makes sense.“Increasingly what we’re seeing is a greater number of people who will never get onto the property ladder, so they’re going to be renting through retirement,” Glancy explains. “Rents, of course, have been going up very significantly as well. So if you’re going to be renting, you need to be saving an awful lot of money all your life, because you’re going to need a much bigger pension pot.”

There are no easy answers for young people trying to balance saving for a house and preparing for retirement (iStock)

Feeling stressed yet? It’s a tough situation and, as Glancy says: “There isn’t an easy answer, especially at the moment.” Auto-enrolment will soon be extended to those aged 18 and over, which could help younger workers going forward. “If you’re auto-enroled at 18, as opposed to 22, an interesting statistic is that it will increase the size of your pension pot by 15 per cent,” Glancy adds.

On a practical level, it’s worth looking into the options provided by your employer. They might offer a salary sacrifice arrangement, where you agree to a slightly lower salary, your company pays the “sacrifice” into your pension (and you both pay less National Insurance). Or they might offer a tiered contribution structure, whereby “you put in another one or two per cent, [and] they might put in an extra two or three per cent,” Glancy explains.

Perhaps the most important thing we can do, though, is to stop burying our heads in the sand about retirement – even if thinking about it feels tedious, a bit scary or simply too distant. Your older self will thank you for it.