The current generation of pensioners is doing better financially than any before it. However, a report from the Institute for Fiscal Studies (IFS), warns future generations may not be as fortunate.  

While retirement may seem like something you don’t need to think about until you reach the milestone, it’s more important than ever that younger generations engage with retirement planning early.

Since 2009, for the first time in history, the average income of pensioners is similar to those under the State Pension Age. In addition, pension poverty rates are lower than the population average. Many retirees are enjoying a comfortable and financially secure lifestyle. 

Yet, for those still working, the IFS describes a similar future as looking “risky at best”. 

There are several reasons why retirement prospects could decline for younger generations, including:

1. Homeownership is falling

Soaring house prices mean, in the future, it’s likely more retirees will be renting and face higher outgoings.

According to the IFS report, at age 65, only 3–4% of those born in the 1930s and 1940s lived in private rented housing. For those born in the 1960s, it is forecast to be 10%. For younger generations, renting in retirement is expected to become commonplace. If they haven’t thought about how rental payments will affect how much they need to save, they could face a shortfall. 

2. The number of defined benefit pensions has declined 

Defined benefit (DB) pensions, also known as “final salary pensions”, provide you with a guaranteed income from your retirement date. However, as the responsibility to provide an income lies with your employer or pension scheme, they’ve fallen out of favour. Instead, defined contribution (DC) pensions are now more popular.

With a DC pension, you save into a pension pot and have a lump sum to turn into an income at retirement. You will be responsible for deciding how to use your pension and ensuring you don’t run out of money during your lifetime.

DC pensions are often less generous and come with greater challenges for retirees when compared to DB pensions. 

3. Employees are saving relatively little for retirement 

While the number of people saving into a pension has reached record highs thanks to auto-enrolment, the amount workers are putting away often isn’t enough to secure a comfortable retirement. 

The IFS report found nearly 90% of workers are saving less than the 15% the Pensions Commission says is appropriate. So, even if you’re putting money away for retirement, you need to consider if it’s enough. 

3 valuable steps you can take today to improve your retirement prospects 

To achieve the same level of financial security in retirement as today’s retirees, workers need to engage with their long-term plans throughout their working life. If it’s something you’ve been putting off, here are three steps you can take today. 

1. Review your pension now

While you may be making contributions each month, when was the last time you looked closely at your pension? It’s a crucial step for understanding your wealth in retirement and whether you’re on track.

Dig out your latest statement for each of your pensions and review the information. Some of the key questions you should answer are: 

• What percentage of your income are you contributing to your pension each month?
• What contributions are being made by your employer or other third parties?
• What tax relief are you receiving, and are you claiming your full entitlement?
• What is the value of your pension now?
• What is the projected value of your pension at your retirement date?

Armed with this information you can start to understand if you’re doing “enough” to fund the retirement you want. 

2. Set out your retirement plans

Getting to grips with the value of your pension is only part of understanding if you’re on track for retirement – you also need to set out what you want your retirement to look like.

One of the first things to consider is when you want to retire. Your retirement date will affect how the value of your pension will change during your working life, and how long your savings need to provide an income.  

Then, you want to consider your ideal lifestyle and what income you’ll need to achieve it. While some expenses may fall when you give up work, others will rise, so creating a retirement budget is useful. Remember to include large one-off costs, from updating your home to travelling, if they are part of your long-term plans. 

3. Book a meeting with a financial planner 

A financial planner can help bring together your assets and goals. While you might know the forecast value of your pension at retirement, do you know what income it could sustainably deliver? These are the kind of questions a financial planner can help you answer.

A retirement plan that’s been created for you can give you confidence in the future.

Start planning for your retirement today

It’s never too soon to start thinking about your retirement and how to achieve the lifestyle you want. Contact us to talk about how you could improve your retirement prospects. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.