A portion of tax free cash could be set aside to help cover the need for later life care should it arise, though our own research has found retirees tend, understandably, to avoid consideration of this stage of retirement.
This could be mitigated to a degree by guidance and advice provided at the point of pension access and through retirement, which could ensure tax free cash is not considered as a windfall, as it is currently by many. If, fortunately, money is not needed for care, then it could form part of the inheritance.
When we consider other generational differences, such as homeownership, the picture becomes even less clear.
The 12 per cent figure is just about adequate for those who reach retirement without mortgage payments or rental costs. But homeownership is being reached later in life for many, meaning they will continue to pay mortgage repayments in retirement, and fewer overall will ever own a home.
Recent statistics suggest a third of millennials will be lifetime renters and we expect this figure to be even higher for Generation Z.
Lifetime renters will face higher living costs in retirement, as well as having no property equity to deploy when needed.
They therefore need to be saving more than the 12 per cent to accrue a pot large enough to sustain a decent retirement.
Tisa’s research shows that a lifetime renting household can expect to run out of private pension savings 12 years before a household who own their property at retirement.
For the next generation, we therefore need to make sure they begin to save early, from the very beginning of their workplace lives.
Luckily, Gen Z have a long time to save. If we begin to implement changes this decade, the youngest workers will be able to commence their pension saving from 18 and will have around 40 years of compound interest to gain.
This gives Gen Z a real opportunity to reach retirement with the pension pot they need. The longer we defer these decisions, the greater the likelihood more generations will approach retirement with inadequate savings. Overall, people tend to underestimate their life expectancy and do not place much importance on later life costs.
Pension inadequacy does not need to be a reality. We need to ensure AE remains relevant against a constantly changing backdrop of working patterns, personal wealth and tax. This is the task that Tisa, pension funds and legislators must undertake as a matter of urgency.
*The household journey includes one adult taking time out to raise two children and finishing work at 60 to carry out caring responsibilities. The other adult has 40 years of AE contributions. Basic assumptions include an annual 2.5 per cent salary increases, annual 5 per cent investment growth with figures discounted back to today’s terms.