Young Britons will need to save nearly a fifth of their annual salary into a pension to enjoy an adequate retirement, according to a new think-tank report.
People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK said in a report published on Thursday.
According to the report, young workers in the UK will need to put away 18 per cent of their earnings each year in order to have an “adequate retirement income” — a higher proportion of their earnings than their counterparts in any other OECD country.
Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.
The ILCUK warned that young workers would need to save an even higher amount — 20 per cent — to achieve the same level of retirement income enjoyed by today’s pensioners.
A combination of low investment returns, sluggish wage growth and the decline of traditional defined benefit schemes — which pegged retirement income to salary and length of service — have all contributed to young workers’ pension insecurity, the ILCUK said.
But Blackbullion, a business that provides financial education for university students, said most young people would be overwhelmed if they were asked to set aside 18 per cent of their earnings for retirement.
“The average person would say ‘where the hell will I find that’,” said Vivi Friedgut, the company’s founder. “Even 10 per cent is a challenge for the average graduate who is facing student loan debt and crippling rental costs, particularly in London.”
The ILCUK is the latest influential group to warn over the savings challenges faced by young people, who are mostly enrolled in riskier “defined contribution”, rather than defined benefit, workplace pension schemes.
The World Economic Forum recently warned that the retirements of future generations risked being imperilled by the pension funding crisis.
In its report, the ILCUK noted that only 12.4 per cent of people in the UK are currently saving more than 15 per cent of their earnings for retirement, leaving the majority of people in poor standing to achieve an adequate retirement income.
More than 8m British workers have been automatically enrolled into workplace pension schemes since 2012. In workplace pension schemes, the combined minimum paid into a pension, by both employer and employee, is 2 per cent of a band of the worker’s earnings, not their total salary. This is set to rise to 5 per cent in 2018, and 8 per cent by 2019.
The ILCUK petitioned the government to raise pension contributions automatically to workplace pension schemes unless employees opt out. It also called for additional support for self-employed workers, who are not automatically enrolled into workplace pension schemes.
“The government must do more to extend pension coverage and ensure the contributions towards private schemes are sufficient,” said Dean Hochlaf of ILCUK. “Especially among overlooked groups such as the self-employed and those low incomes.”
The government is currently reviewing its automatic-enrolment workplace pension policy, but it is not expected to make recommendations on contribution rates as part of the review.
The Department for Work and Pensions said: “Young people are embracing pension saving and almost seven in 10 eligible 22-29 year olds working in the private sector are now enrolled in a workplace pension.
“As contributions increase, young people will be able to save even more towards their retirement and our review is looking at how we can build on the success of automatic enrolment and encourage people to save even more into their pension.”
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