Can you retire better off than your parents?
Leading experts, including Schroders' Senior Strategist Sangita Chawla, speak to The Times about the obstacles facing today's savers as they try to retire better off than their parents.
Illustration: Andrea Ucini
This article was written by The Times in February 2019. All views and opinions are those of the publication unless otherwise stated.
We have become accustomed to the idea that each generation should be better off than their parents.
Those who came of age in the early 1950s, for example, felt blessed compared with their parents, who faced the mass unemployment of the 1930s. In turn, their children – the baby boomers – expected to earn more than their parents and work towards a happier, more prosperous retirement.
This progress appears to have slowed. The financial pressures of the past decade – an era of squeezed incomes and austerity – combined with the explosion in student debt and soaring house prices, threaten to break the cycle. Nowhere is this more evident than with retirement planning.
Today’s pensioners built their later-life wealth with guaranteed final salary pension schemes and state benefits – designed at a time when life expectancies were shorter and payouts more generous. Their children have seen these schemes all but disappear and the state seek to cap the cost of pensions with increases in the state retirement age. And while they can expect to live longer, they will need more money to match their parents’ lifestyles. However, their savings have not risen accordingly.
Regulators are concerned. The Financial Conduct Authority warns that 15 million Britons may have to work on into their seventies or eighties. This is a generation that may look back on their parents with envy. But will they be able to retire better off than their parents?
Yvonne Braun, Director of policy, long-term savings and protection, Association of British Insurers
"There’s no doubt that Britain’s young are living in a tougher financial environment than their parents.
"But there is light at the end of the tunnel.
"Auto-enrolment – whereby people are automatically opted in to pensions savings through their employer - has made a significant impact, especially among the under-thirties, where opt-out rates are the lowest across all ages.
"That’s good news: small, regular contributions from early on in a working life can, over time, build large pension pots. Workplace pension savers also enjoy employer contributions and tax relief.
"The proliferation of apps offering access to long-term and short-term savings products has also proved popular among young “digital natives”. And the pensions industry is working with government on pension dashboards to enable people to see their entire pension entitlements at the click of a button.
"But more needs to be done. A contribution rate of 8% of salary will not deliver a comfortable retirement for many, and more thought is needed to address the long-term financial security of self-employed people, as well as women – and men – taking caring breaks."
David Willetts, Executive Chairman of independent think tank the Resolution Foundation
"Pessimism abounds about the retirement prospects of future generations. The decline of defined benefit pensions, lower savings rates, poor pay growth and lower home ownership have all had a negative impact.
"But policy can, and is, responding. Thanks to the success of auto-enrolment, young people are now saving from the start of their working lives. The universal flat rate state pension will also create new winners in retirement, particularly women. That said, the pension, while generous, comes at the expense of the next generation of pensioners. This is a problem that needs to be addressed.
"First, the pensions industry should look to capitalise on the evident success of auto-enrolment. It should also reduce the risks around future retirement income. Risk pooling, via collective defined contribution schemes, could be one way to do this.
"Second, tomorrow’s pensioners must have the same housing security in retirement as today’s. This means boosting rights for private renters and, above all, building more houses.
"Future generations are entitled to enjoy a secure retirement income, just like today’s retirees."
Own your pension planning
Generous pension provision is a thing of the past, says Sangita Chawla, Senior Strategist at Schroders. Today’s young face a much tougher environment.
"There’s been a shift in the workplace. Employees now have to own their pension planning and retirement outcomes in a way that just wasn’t necessary for previous generations. The days when you could build up a guaranteed pension with barely a thought are well and truly over. That is a tough reality, especially for younger generations facing other, immediate financial pressures.
"Still, there are things that society and the pensions industry can do to help. The pension dashboard (tracking all of your pensions in one place) is indeed a good idea and auto- enrolment has made an impact, but we need to go further.
"Just being able to visualise your pension progress is no use if you don’t know how to take action, and people – even with auto-enrolment – are still not saving enough. We need to encourage people to increase their pension provision by, for example, harnessing the latest ideas from behavioural science, such as nudge theory. New technologies, such as artificial intelligence, can help develop more personalised approaches to support people as they save.
"The same messages still apply: people need to save more and do so earlier, and understand how hard their assets need to work.
"However, the priority must be to deliver those messages more effectively and help people respond."
- Read more about how Schroders can help your clients aiming to improve thier retirement journey
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