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£400k short: why millennials' pension sums don't add up

People born at the end of the last century underestimate how much they need for their pension because they do not understand how long they will live and what retirement will cost.


by Michelle McGagh on Jun 01, 2016 at 17:10

£400k short: why millennials' pension sums don't add up

'Millennials', or the people born at the end of the last century, generally underestimate the amount they need to save for their pension by up to £400,000 because they do not understand how long they will live and what retirement will cost.

Millennials – also classed as those aged 25 to 34 – often fail to factor in advances in life expectancy, estimating they will live until age 79 when the reality is they can expect to live to an average age of 90, wile one in five will reach 100.

Underestimating their longevity is not the only problem. They are also vastly underestimating the amount of money they would need to save in order to generate the retirement income they want, according to Tony Stenning, head of retirement at BlackRock, the fund manager.

When surveyed millennials say they would like to retire on £27,000 a year, which would require them to save £540,000 into their pension pot. However, millennials believe they need just £167,000, a massive shortfall of £373,000.

Even when the state pension of around £8,000 is factored in to the calculation, millennials still need to save £390,000 into their pension, leaving them £223,000 short.

‘There is a big misunderstanding about the size of the [pension] pot needed,’ said Stenning. ‘If we do not address this then it will become a societal problem and by 2035 we will have a generation retiring who will be worse off than the previous one and that has not occurred for 100 years, and it will have a profound effect.’

Stenning said that saving needed to be made easier and that it was easier to take on debt than to save.

‘We need to make saving much easier, we need to level the playing field between debt and savings, not by making it harder to get debt but to make saving easier,’ he said. ‘We also need to help people solve this problem of how long they are going to live for and how to have enough money to last them for retirement.’

In order to take control of their retirement, millennials need to look at pension saving not from the point of view of how much they can save each month but work out how much they need to save and work back from there.

Stenning said ‘you would not buy a house if you did not know how much it was and how much the mortgage was, and just made a monthly payment [in the hope you would pay off the mortgage]’ and retirement should be no different.

The gap between millennials' expectations of retirement and the reality they will face as a pensioner, could be fuelled by the retirements they see their parents or grandparents enjoying. However, young people should not assume their retirement path will mimic that of the current generation of retirees.

Today’s retirees are enjoying new pension freedoms that allow them to access their defined contribution (DC) pension pots as cash lump sums. Some can also rely on their employers' 'defined benefit', or final salary, pension schemes – which pay out a set income each year based on a multiple of years worked in a company and a percentage of final salary – to cover their retirement costs.

However, young people will not have the cushion of final salary pensions to fall back on and therefore will be relying on their DC pensions, which are built on contributions and stockmarket performance, to fund their retirement.

Claire Finn, a pension expert at BlackRock, said final salary pensions had died off and the introduction of auto-enrolment had made defined contribution schemes ‘the future for the vast majority of people in the UK’.

‘People retiring now and in five years, [their retirements] will look a lot different to those retiring in 20 years because [the latter group] will not have any DB pension to rely on,’ she said.

Finn predicted that annuities would play a big part of retirement income, even though the chancellor has changed the rules so no one has to purchase one anymore.

Annuities would be used to cover ‘base line needs’ in retirement, such as bills, with the remaining money in the pension remaining invested through drawdown for ‘discretionary spending’.

However, before they get to retirement she said individuals needed to understand that retirement may not be everything they imagine based on the experience of older generations.

Younger people may need to ‘keep working [beyond their preferred retirement age] and contribute more’, said Finn, and people need to ‘understand the levers they can pull before they get to retirement’.

6 comments so far. Why not have your say?


Jun 01, 2016 at 19:12

"£27,000 a year, which would require them to save £540,000 "

Why do all of these articles utterly fail to give a true picture with an index linked pension ? To have £27,000 index linked would take some £945,000 at current annuity rates, assuming the later retirement at, say, age 69 will also lead to 4 years' longer life expectancy than now.

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Jun 02, 2016 at 00:52

Well said Jon.

Why must we tolerate articles on pensions written by people that do not understand pensions and pension mathematics.

Oh and incidentally that £945,000 you somehow need to amass is pretty much at the maximum pension pot limit of £1M allowed by the government tax rules. So nobody is going to be allowed to save for a pension any larger than that.

Oh and meanwhile Boy George is trying to replace DC pensions that get tax relief on the way in, with Pension ISAs with no such tax relief, just a vain hope that the politicians wont tax the pension ISA income in 40 years time. Gosh I see a flying pig.

Pensions are a mess. A system that worked and didnt ask the vast majority to understand something which is totally beyond them, has been systematically ripped apart and destroyed by self serving politicians. It started with Brown.

Well at least I will be dead and wont have to watch the train wreck that is coming in 30 years time.

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Jun 02, 2016 at 09:10

Jon - Forget annuity rates, by the time millennials retire annuities will be a distant memory.

Millennials will have discovered that you only need an average return of around 4% to beat an annuity, and if you can get the return up to 6% your fund will never run out - in fact it increases in value the longer you live. If you don't believe me, find that website that calculates compound interest and put the figures in.

"These articles utterly fail to give a true picture with an index linked pension"? When do you want the highest income from your fund? When you're 65 and back-packing round Peru, or 93 and watching "Countdown" in an old people's home?

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Jun 02, 2016 at 11:10

All well and good for now Maverick. Buit do you remember when inflation hit 29% pa ?

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Jun 02, 2016 at 14:03

Jon - Yes, but it was a momentary blip and by no means representative of long-term inflation rates.

My point was that I (and a growing number of others) would rather draw down pension and manage my own fund than pay my entire fund over to an insurance company.

The problem is that you then only have yourself to blame if it goes wrong. But I'll take my chance on that.

You will also remember that Equitable Life came within a whisker of collapsing because it promised annuities it couldn't honour. You only need one annuity provider to go under and the whole principle of annuities is blown to bits.

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Aug 06, 2017 at 02:13

So millennials who are struggling with huge rents or huge mortgages (if they're lucky) & probably paying off student debt, need to save 540k? for a reasonable retirement? If the bar is set higher than you can possibly jump, why would you even bother?

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