Why young people need to act now to avoid pension poverty and how you can help

Neal Shepherd, Partner at Secondsight highlights in his latest blog the dangers young people are facing by putting off their pension saving.

Young people who put off paying into a pension could threaten their future living standards in retirement.

According to a new study from the Institute of Fiscal Studies, “many are likely to face substantial financial difficulties in older age”.

Advocating for policy action to help reverse the problems that may affect millions of future retirees, the report is the first of a multi-year project designed to produce evidence around future financial security for retirees.

The cost of living crisis is creating barriers

Regardless of age, the rising cost of living is hindering people’s ability to save for the future.

For many looking to cut costs in the present, it can be easy to see that reducing the amount you pay your future self could be an obvious move – either by decreasing or stopping contributions into your pension.

Although this might seem like a good idea right now, it could have a big effect on the lifestyle you can live in retirement.

For 20-somethings, retirement may seem like a distant dream

It’s particularly easy for young workers to dismiss pension saving as something they needn’t worry about right now. When you’re in your 20s, retirement can feel like a distant dream – certainly one too far away to worry about in the immediate when there’s fun to be had.

As a result, saving money is often likely to be focused on the near future – a holiday, a first home, putting something towards clearing that student debt, or simply making it to payday.

This means that many fail to focus on pension savings until they reach their late 30s, 40s, or beyond. The problem with this relaxed approach to retirement saving is that it could prevent people from enjoying the lifestyle they desire in later years.

The situation may be worse still for those who have been unable to afford to get on the property ladder as they will need to have the funds available to pay for rent, in addition to paying for food and their usual household bills.

Ultimately, how young people approach their pension savings in their 20s and 30s can make a huge difference to how much they’ll have to spend in retirement. And the younger people start the better.

Wherever possible or appropriate, it’s helpful to encourage employees to save as much as possible into their pension – whether through the workplace pension, or a personal plan – and make sure they understand the benefits of tax relief.

Here are a few ways you can help encourage your young (and not so young) employees to save for their retirement.

3 top pension saving tips to share with your employees

1. Maximise your workplace pension contributions

All employers must provide a workplace pension plan and automatically enrol every worker who is 22 or over and earning more than £10,000 a year.

This means that, unless you opt out, money is taken from your pay and invested into the workplace pension, alongside the employer contribution.

The minimum contribution that must be made is 8% of your salary, of which at least 3% is paid by your employer.

If employees opt to contribute more to their workplace pension, employers will sometimes offer to match some or all of these contributions, which can help to increase your pension pot further.

2. Benefit from tax-efficient savings

Making regular contributions to your pension is a great way to benefit from tax-efficient savings.

The government provides relief on all pension contributions up to the Annual Allowance, which stands at £60,000 (or 100% of earnings if lower) for the 2023/24 tax year.

Tax relief is automatically paid at the basic Income Tax rate of 20% (higher-or additional-rate taxpaying employees can claim additional relief through self-assessment).

This is true for workplace pensions and personal pension plans.

3. Understand the positive effects of compound growth

Making regular pension contributions when you’re young means that your savings have more time to benefit from the effects of compounding. Starting early and establishing a strong saving habit is crucial if you want to reap the full rewards of compound growth.

Even if the amount of money you’re investing in your pension each month may seem small, your contributions (and those of your employer, and the tax relief from the government) will add up and, ultimately, could make a big difference later down the line.

Ask an expert to explain more

At Secondsight, we’re passionate about educating and advising people and would love the opportunity to help your team make the most of their retirement savings.

We can work with you to embed financial education into your organisation and improve the wellbeing of your workforce. This type of education has been proven to help businesses boost productivity and engagement.

Our financial education programme covers a range of topics, including pensions and retirement savings.

Get in touch

If you want to know more about how you can help your employees to grow their pension wealth for a comfortable and sustainable retirement, please get in touch.

Email info@second-sight.com or call us on 0330 332 7143.

 

Please note

This blog is for general information only and does not constitute advice.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

Secondsight is a trading name of Foster Denovo Limited, which is authorised and regulated by the Financial Conduct Authority.

Information correct at time of publishing, 9th May 2023