As the economic and societal landscape continues to evolve, the question of whether pensions will still be fit for purpose and a reliable source of income for today’s Millennials and Gen Z is more pertinent than ever.
Given the Retirement Living Standards’ (developed by the Pensions and Lifetime Savings Association) calculation for what an individual will need in retirement continues to increase year on year, the amount that current young people will need is likely to be considerably bigger than today’s figures of £14,000 (minimum), £31,300 (moderate), £43,100 (comfortable).
The dichotomy is that as life expectancy increases, household bills and the cost of living will continue to rise at a rapid pace meaning the pension pot is going to need to work harder than ever to ensure the nation’s future retirees don’t outlive their retirement savings.
The likelihood is that the state pension will not be around in its current guise; having either been reduced, will be means-tested in some way, or defunct altogether. And in the event it is still around, it certainly won’t have kept up with inflation.
Today’s younger generations are also more likely to be renters rather than homeowners, which will be a particularly challenging situation given rents tend to rise faster than inflation – and it is virtually impossible that the state pension will be sufficient to cover the cost 20 years from now. Traditionally, financial modelling for retirement assumes that you won’t have housing costs, as most people would have paid off their mortgage by that point.
While for those who do manage to get on the property ladder, the likelihood is that they will still have a mortgage when they hit retirement age. This adds an additional financial burden that must be planned for, as carrying mortgage debt into retirement can significantly impact financial stability.
Carina Chambers, Pensions Technical Expert at digital wealth manager, Moneyfarm, says: “For Millennials and Gen Z’s lucky enough to own their own homes by retirement age, I think we will see rooms being rented out to lodgers becoming far more the norm in a bid to help pay the bills. I also think they will give more serious consideration to downsizing to a less expensive area than probably today’s Baby Boomers have done.”
The shape of work for Gen Z is also likely to be more fluid and dynamic. Realising that they may never get to fully retire there is an increasing trend towards ‘micro dosing retirement’ – where career breaks are taken every so often to focus on personal interests, travel, or mental health, rather than waiting until traditional retirement age.
While this might be beneficial in enhancing wellbeing and life satisfaction, it could be damaging financially if, during these sabbaticals, pension contributions are paused or never resumed, leaving a significant hole in the pension pot through the loss of employer-matched contributions and the missed opportunity for compound growth over time.
Add to this the fact that more and more people are remaining single or will be at the stage of life when divorce is more common, exposing them to the ‘singles tax’ – the financial burden of managing living expenses on a single income household compared to couples.
Carina concludes: “Millennials will get to retirement with a very different cost structure to today’s retirees, and this is an issue young people, policy makers and pension advisors alike would be wise to examine.
“The fact is, the size of the pension pot needed during retirement for today’s 18- to 45-year-olds will be considerably larger than in previous generations due to increased life expectancy, rising living costs and the different shape of lifestyle they aspire to lead. This means that today’s younger generations must be more proactive and strategic in addressing the unique challenges they face. By doing so, they can ensure a more secure and comfortable retirement, despite the evolving financial landscape.
“Investing in a workplace or private pension is therefore still critical, and ignoring, or not contributing to one would be a massive mistake.
“Pensions will still be fit for purpose but the goal posts will have changed. Young people will need to plan with far more precision and be prepared to contribute far more heavily than any previous generation, because it is going to fall much more on the individual to financially support themselves than ever before.”
