The Scottish Widows Retirement Report 2023, together with its inaugural National Retirement Forecast, provided some unique pensions insights associated with specific age groups, as well as other ‘retirement vulnerable’ groups such as the self-employed and those with a disability.
However, the findings linked to young adults proved perhaps the most arresting.
Downturns tend to disrupt long-term savings habits
For example, the Scottish Widows study found that 17 per cent of 22 to 29-year-olds had responded to the income pressures associated with the current cost of living crisis by reducing their pension contributions.
Alarmingly, across all age brackets an average of 13 per cent had reduced their pension contributions in response to falls in disposable income as inflation climbed.
Interestingly, a 2020 study from Dunstan Thomas of generation X (now aged 40 to 55) also uncovered evidence of this older group taking long pension contribution holidays during the great recession of 2008-2013.
Our findings also suggested many of them never went back to regular pension contributing after unplugging.
Heading for retirement hardship
The Scottish Widows report also calculated that nearly half (41 per cent) of people currently in their 20s are heading for "hardship in retirement", with an average retirement income of £10,000 anticipated among this age group.
The Pension and Lifetime Savings Association’s ‘minimum’ lifestyle calculations, from its retirement living standards, demand £12,800 of annual retirement income for a single person and £19,900 for a couple living outside London.
We also know from other studies that it is taking much longer for young people to climb onto the housing ladder.
As we all know, equity release or downsizing are clear options to top up retirement income for homeowners today.
However, home ownership data from Halifax, the Office for National Statistics, and UK Finance shows that the average age for first-time buyers in the UK has been rising fast – from age 30 in 2007, to 34 in the latest numbers gathered in 2021.
According to Scottish Widows, the number of people predicted to be renting into retirement will triple over the next 15 years, and this will have a major impact on retirement income levels needed.
In the South East of England rental price increases already gobble up nearly all of average retirement incomes – and in London that is 131 per cent.
So, arguably the most significant challenge for ensuring that those in their 20s today can retire at a reasonable age, perhaps close to their state pension age, is to get them paying enough into their pensions in a consistent way, rising as their income rises, and ideally running at 12 per cent or more of their earnings – assuming they are at or above appropriate earnings thresholds for auto-enrolment entitlement.
The reality is that many in their 20s are not in full-time single employer work today. Several have a suite of erratic earnings sources.
Some run internet-based ‘side hustles’ that generate irregular income. Others are part of the gig economy.
These sorts of working patterns do not lend themselves to regular pension-based saving.
