A new report suggests that young people in their 20s entering the workforce now should save 18 per cent of their earnings into a pension if they are to have an adequate retirement and 20 per cent if they would prefer the sort of retirement enjoyed by those retiring now.
According to the International Longevity Centre-UK (ILC-UK), people retiring today do so on incomes worth around three-quarters of their average earnings. However, young workers new to the workforce face financial challenges, such as getting on the housing ladder and repaying student loans, which means that the 18 per cent savings target is out of reach for many of them.
In its report entitled The Global Savings Gap, the ILC-UK argues that the UK pension system is “middle ranking on adequacy and intergenerational fairness” compared with other high-income economies.
It says that low investment returns and interest rates, sluggish economic and wage growth and the gradual decline of Defined Benefit (DB) schemes means that young people entering the workforce today will face a hostile economic environment in which to build their pension pots. This means they will need to put more away in savings to achieve an adequate retirement income.
Although more people are saving towards a pension in the UK now because of auto-enrolment, the report suggests that many are still failing to save sufficiently. In addition, many who are self-employed or in part-time work are neglected by such initiatives.
As one of the think-tank’s analysts commented, today’s young people will need to save more to enjoy their retirement. He added that the Government must do more to extend pension coverage and ensure that contributions towards private schemes are sufficient.