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Young British workers required to save 18% of their annual earnings to enjoy an adequate retirement income says Think Tank

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A new international report, produced by the International Longevity Centre – UK (ILC-UK), has deemed the UK pension system sustainable but inadequate, with young people today facing a monumental savings challenge to ensure a decent retirement income

“The Global Savings Gap” argues that the UK pension system is “middle ranking on adequacy and intergenerational fairness” when compared to other high-income economies.

The report, supported by Prudential plc, explores the pension systems of 30 high income countries and regions, measuring performance according to affordability, adequacy and intergenerational fairness.

Low investment returns and interest rates, sluggish economic and wage growth and the gradual decline of Defined Benefit schemes means those entering the workforce today will face a hostile economic environment in which to build their pension pots. This ultimately means people will need to put more away in savings to achieve an adequate retirement income. Key findings include: –

  • 18% of earnings need to be saved each year to achieve an adequate income in retirement
  • 20% of earnings need to be saved each year to match the income adequacy enjoyed by current retirees

Thanks to auto-enrolment, more people are saving towards a private pension in the UK, but the report suggests that many are still failing to save sufficiently. Furthermore, many who are self-employed or in part-time work are neglected by such initiatives.

Dean Hochlaf , Assistant Economist, ILC-UK said:

“The combination of persistently low returns, sluggish wage growth and a changing labour market means today’s young people will need to save more to enjoy their retirement. The government must do more to extend pension coverage and ensure that contributions towards private schemes are sufficient, especially amongst overlooked groups such as the self-employed and those on low incomes who have yet to benefit from initiatives designed to improve private savings”.

Vince Smith-Hughesretirement income expert, Prudential, said:

“As the ILC-UK analysis shows, action is needed now to further embed pension saving in to our workplace culture so that all, but in particular the younger, generations can look forward to a comfortable retirement.

“It’s long been our view that for most people, saving as much as possible as early as possible in their working life is the best way to ensure they have control over their financial futures and are well-prepared for a comfortable retirement.

“While speaking to a professional financial adviser can often help ensure that retirement planning is best suited to individual’s circumstances, we mustn’t forget that there is also a great deal of free impartial guidance out there from sources such as the Pensions Advisory Service or the government’s Pension Wise service.”

In addition to the international analysis in the report, bespoke survey data was commissioned to examine savings behaviours across five countries. Collected by Ipsos MORI the data confirmed:

  • Only 12.4% of people in the UK are saving more than 15% of earnings, meaning the majority are far off achieving the 18% required for an adequate retirement
  • Furthermore, over 30% of people between the ages of 25-44 make no savings whatsoever. This group is particularly vulnerable, and unless they can accumulate some private savings over the coming decades, they are likely to go into retirement with extremely inadequate incomes
  • Fewer than 1 in 10 [9%] had a specific savings target for retirement, compared to around a third in the US and Singapore [29% and 33%] and over half in Hong Kong [59%]

The report notes several key policy challenges that the UK pension system must address:

  • Auto-enrolment has proven effective in increasing private pension coverage in the UK, but people are still not saving enough. Government must consider whether to harness the “nudge” approach to support higher contributions. Auto-escalation is a potential policy option, which would automatically raise pension contributions unless the individual chooses actively not to
  • Certain groups such as the self-employed must also have access to private pension schemes. Between 1984 and 2015, the number of self-employed people in the UK rose from just under 3 million, to well over 4.5 million. The growing number of self-employed people have not benefited from auto-enrolment, or from additional perks of occupational pension schemes such as employer contributions. As non-traditional employment continues to grow, these groups will need additional support to improve their access to private pension schemes
  • Financial capability was already an issue in the UK, and with the UK now putting a greater burden on the individual to save for their retirement, this is an even higher priority. Individuals need to be aware of what choices there are available to them when it comes to saving towards retirement and how these choices will affect their future income.

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