In Focus: Intergenerational Wealth  

Why it is important to start pensions early

Why it is important to start pensions early
 Photo by Helena Lopes via Pexels

Young savers and the self employed saw the largest proportional increases in financial vulnerability during the pandemic, rising by more than 40 percent, according to the Financial Conduct Authority.

Since young people are now more likely to be much less comfortable retiring than their parents, it is important to start preparing for retirement sooner rather than later. 

Advice firm Purely Pensions has warned that savers in their 20s could lose more than £21,000 at retirement if they put off making contributions to their pensions for the first five years of working. 

Matthew Amesbury, head of Pensions Advice at the firm, says the pandemic has delayed young people starting to save for retirement since more young people are seeking ways of maximising take home pay.

He said this meant many stopped pensions contributions, which would result in them missing out "massively on the benefits of compounding interest and long-term growth’’. 

Pandemiceffect

Earlier this year, a survey by workplace savings provider Cushon found concerns about saving for retirement reduced by 20 per cent in May compared with the same period last year, while 75 per cent said the coronavirus made them realise having accessible savings was 'equally important' to having a pension. 

Some 41 per cent of those surveyed would like to see their employers implement a ‘pension redirect arrangement’ which would mean money is redirected into a separate pot to cover immediate and medium-term financial priorities.

In terms of a generational divide, a New York Life Survey in July surveyed 2,200 adults across three generations of working-age people. It found that millennials feel the most confident of all 3 generations about their retirement prospects.

For instance, 68 per cent of Millennials are confident they’ll retire when they planned versus 62 per cent of Generation X. 

In fact, in 2019, according to a study by Insider and Morning Consult, only 50 per cent of this generation had a retirement account and only 36 percent were actively saving according to a study by Insider and Morning Consult. 

Looking to the future of pensions, the recent shift in Europe, North America and parts of Asia to move from defined benefit to defined contribution plans puts the burden of creating and executing the pension strategy on the individual.

This includes weathering market shocks and making sure their pension pot lasts as long as they do.

The shift from the paternalism of company pensions that provide fixed benefits to the financial individualism and insecurity of defined contribution schemes comes at a cost to the young. 

Since the data shows the majority of young people are not good at managing the risk of retirement savings on their own, they can often underestimate the financial risk of growing old and how inflation can erode savings.

This can lead people to not saving enough and making poor income choices at retirement.