Pension problems for millennials

Pension pot
By Eleanor O'Neill, Student Blog

15 May 2017

Your pension is likely to operate on completely different principles than your parents'. Are you prepared for your golden years?

With the news that millennials could face the prospect of no state pension until age 70, or potentially not at all, the pressure is on for millennials to make the right decisions in their youth to sustain a standard of living in old age. 

The pressures of student loan repayments, rental or mortgage bills and all the other expenses of modern life, make it easy to see why young workers may be tempted to opt-out of a pension scheme that requires them to give up a percentage of their salary. 

But coupled with the limited guarantee of a state pension, it's time to start thinking right now about the next 50+ years of your life. 

Considering that research from Aon has suggested that most members of a defined contribution (DC) pension scheme will find themselves £1,400 a year short upon retiring, can you really afford to bank on your company scheme?

Sophia Singleton, ‎Partner and Head of DC Consulting at Aon Hewitt, said: "Auto-enrolment has successfully increased participation in pension schemes, but the vital next step is to ensure that these new entrants save a sufficient amount for retirement." 

What is in your pension pot?

You can make use of the Money Advice Service Pension Calculator, which lets you work out how much you should be saving on top of your company and state pensions to achieve your target income in retirement.

For example, if you earn £30,000 a year and your company pension scheme is structured for your employer to add in 6% for every 3% you contribute, then retiring at 68 (with a state pension) will net an annual retirement income of £14,899.

The Lifetime ISA became an option for under-40s from 6 April 2017.

However, these calculations assume a consistent income throughout your career and do not appear to account for the pension triple-lock, which guarantees that state pension payouts will rise by at least 2.5% every year.

The study conducted by Aon last year found that 2.75 million DC scheme members will not have saved enough through their plan alone to maintain their standard of living in retirement.

Is the (L)ISA an alternative?

The Lifetime ISA became an option for under-40s from 6 April 2017. While its primary function is to help young people save for their first home, if the money you pay in goes unused, the fund can be locked away until you turn 60.

Savers can invest up to £4,000 per annum in a LISA, with the government pledging to contribute an extra 25% on top of savings each year as a tax-free bonus. With an annual return of 25% the LISA may seem like a viable alternative to a company pension scheme. 

It may even be available to you as a plan through your employer, meaning your contributions can automatically come from your salary in the same way as a traditional pension.

One of the downsides (or potential upsides) to using a LISA is that you can access funds before you reach 60 but you will forfeit the government bonus on withdrawals and there are likely to be small surcharges imposed. The temptation to make a withdrawal may be too much for some!

The Pensions Dashboard

The Pensions Dashboard, due for launch in 2019, is intended as a platform that will allow savers to see all their pension pots in one place i.e. accumulated pensions from previous employers and other saving schemes.

This tool, if it does all it aims to, will be incredibly useful for working out which plan is right for you.

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  • CA Student blog

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