Gen O are the 16-34 year olds with their heads in the sand when it comes to spending habits and saving for retirement. With the average life expectancy rising alongside the increasing UK population(1), Gen O are faced with an even bigger challenge than generations before them – when preparing for a secure financial future and planning for a comfortable retirement.
Recent changes to the Government’s state pension have left people uncertain about how they’ve been affected – in particular the younger population. Currently 1 in 3 workers in the UK are not confident they’ll have enough to retire on, however almost half of those haven’t tried to calculate what their retirement needs are.(2) We’ve put together a summary of the different retirement options Gen O have, to provide an insight into how they can begin saving for their future.
Government state pensions
When the new state pension was brought in in April this year, 71% of 18-29 year olds didn’t understand pensions or were unsure about them and didn’t know how it affected them.(3) Professor Darren Duxbury, from the Newcastle University Business School, and the Behavioural Research in Finance (BRiF) group, told us that “in light of the highly complex long-term decision problem they face, it is perhaps not surprising that people procrastinate and find it difficult to make a decision on how best to save for their retirement, particularly when there is increased uncertainty brought about by recent regulatory changes to pensions.”
We’ve summed up the differences below:
The OLD State Pension was paid to men when they retired at the age of 65, and women when they retired at 63 before the 6th April 2016. To receive a state pension, you needed to have been contributing National Insurance or collecting National Insurance Credits. The maximum received could be £119.30 per week for the basic state pension for 30 years of NI contributions – 10 years minimum to receive any pension. Your amount could be increased, based on your marital status or if you had an Additional State Pension – based on extra NI contributions.
The NEW State Pension is a flat-rate pension scheme for people retiring after the 6th April 2016, but the age of retirement has changed to 65 for both men and women, increasing to 66 by 2020 and 67 by 2028. For the new pension, you need a record of NI or have NI Credits for a minimum of 10 years, but for the full amount of £155.65 per week you need 35 years. The Additional State Pension has been scrapped, so you can’t contribute extra; also if you had been ‘contracted out’ and had reduced NI contributions, your final amount will decrease. The amount will also increase each year with inflation by 2.5%.
We recently carried out a survey(4) which revealed that only 9% of Gen O keep their savings in a company pension and only 5% keep their savings in a private pension. There’s two main company schemes: a Defined Benefit (DB) scheme, and a Defined Contribution (DC, auto-enrolment) scheme. Next year in 2017, auto-enrolment will be the law and employers will have to automatically enroll their eligible workers into a scheme.
One of the main benefits of these schemes is that your employer has to match what you put in; each company will explain their agreed input when you join. As you move around jobs, options will open up as to whether you can continue paying into that pot, move the sum of money to a new scheme or to leave it. Tax changes introduced in April 2015 gave people new ‘Pension Freedom’; this provides people flexible options as to how they receive their lump sum (read through for further explanation). Employers benefit from a DC scheme over a DB scheme because it’s more cost effective, however it doesn't guarantee that employees will have enough to retire on.
The problem that Gen O are having is that they “feel that investment is not a major concern because they trust their employer (or trustees) to have taken advice and selected the right ‘default’ strategy.”(5) With only 19%(6) of 18-29 year olds understanding how pension investment works, it revealed that a lot more needs to be done to help Gen O understand what it is they’re paying into.
Known as ‘Private Pensions’, they’re available to anyone and you can pay into a scheme yourself rather than through your employer. There’s two types: the ‘Stakeholder Pension’ and the ‘Self-Invested Personal Pensions’ (SIPPs), which work the same way as a ‘Defined Contribution’ scheme; you pay regular amounts into a scheme and that company invest the amount on your behalf. Again, the tax changes brought in last year has allowed people who’ve paid into a Defined Contribution scheme more freedom with how they receive the amount. These are the new ‘Pension Freedom’ options available:
- Leave your pension pot alone (until you retire)
- Guaranteed Income (Annuity)*
- Adjustable Income (Drawdown)**
- Take cash sum in chunks (Drawdown)**
- Take the full amount
- A mixture of these options
*You can withdraw 25% of your total lump sum after turning 55 years old, tax-free, and pay it into an annuity to guarantee income after you retire each year.
**Drawdowns provides flexibility to how much you want to take out of your pension pot before you retire, but after you’ve turned 55.
Gen O don’t want to be thinking about the future at the moment; “retirement is not relevant to them as they are only just embarking on their careers.”(7) Our survey revealed that only 38% of Gen O are saving for their retirement. However with all the changes to pensions, they need to start taking control of their finances and build a comfortable future for themselves – because it seems that it’s only going to get harder(8).
Where does this leave Gen O?
The introduction of the new state pension, combined with the auto-enrolment scheme doesn’t guarantee Gen O will have enough to live on. This is because they’ve got the difficulty of getting work, along with the rising costs of living, the lack of affordable housing and the social and cultural pressures to spend more money. Gen O know they’re struggling to save and it stresses them out, but they’re denying that there’s a problem. Gen O need to be educated about pensions and how they work, so that they can be confident about their retirement and feel motivated to save towards their future.