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Covid unemployment will hit young workers’ pensions hard

Young people who are unemployed due to coronavirus stand to miss out on thousands of pounds in retirement through their inability to find work, risking the retirement outcomes of a generation.

New calculations from interactive investor, the UK’s second biggest DIY investment platform, show that the impact of youth unemployment now will be felt for decades, with ‘deferred pain’ potentially affecting younger people currently out of work right into their retirements.

As official statistics show that the number of 16 to 24-year olds in employment fell by 174,000 between July and September to a record low of 3.52 million, the interactive investor figures show a 21-year old who is out of work for four years until age 25 could miss out on £27,000 on their eventual pot as a result. Having to wait for two years to find permanent work will result in a pension nearly £14,000 lower at age 68.

Young person starting work and pension contributions at different ages

 

Age Pension Value Comparison to starting work at age 21
21 £183,897
23 £169,992 -£13,905
25 £156,833 -£27,064

Source: interactive investor

Centennials have high hopes for retirement

Retirement might not be front of mind for young adults, but they do have ideas for what they would like to do when they are older. The Great British Retirement Survey launched by interactive investor last month (October 21) found that more than half (52%) of ‘centennials’ – those aged 18 to 23 – want to travel in retirement, with the same proportion hoping that retirement will deliver ‘time dedicated to myself’.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “Young people out of work don’t just face financial difficulty now, they could face deferred pain in the future in retirement, as a result of potentially years of missed pension contributions.

“While the impact of coronavirus on retirement plans is unlikely to be top of the priority list for this group right now, it’s something for them to be aware of and plan to make up for when they do find work.

“Despite being young, this group does have ideas of what they want from life when they are older. It would be a sad long term consequence of the pandemic if their hopes for retirement as well as their short term goals, are dashed.”

The impact of missed contributions

Interactive investor warned that contributions missed early in working life can result in bigger shortfalls in retirement pots than those missed later on, as some of the benefit of investment growth over the very long term is lost. It is possible to make up for this later on, but higher contributions would be needed.

The platform urged those who are earning but not in permanent employment and have some spare cash, to consider starting a personal pension and putting in whatever they can afford until they are able to access one through a workplace.

Parents can also consider gifting lump sums to their children to help them get a pension going.

The Great British Retirement Survey also found that older workers aged 55 and over are using pension lump sums to gift money to their adult children.

Ms O’Connor added: “When they find a job, these young workers will have some making up to do on pension contributions. It would be wise, if it’s possible to do so, to pay in more than the minimum auto-enrolment contribution of 8% to help build these reserves back up. That’s because the early years of work really are the golden years when it comes to building up your retirement pot.

“For those young people who are earning, now is the time to take advantage of any savings made through living at home with parents, not going out and travelling less and to put any surplus into your pension.”

State pension entitlement could be affected, too

Years out of work can also affect someone’s qualifying years for the state pension, as you need to have worked and paid National Insurance contributions for at least ten years to get any state pension and 35 years to get the full state pension.

Young women, who are more likely than men to take time out of work later on in their careers to care for children and/ or other relatives, should be aware of the number of years they will need to work to receive some state pension support to their own pension savings.

 

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