A recent survey by NOW: Pensions has found that younger workers expect to retire with a pension pot worth around £95,000. However, the study also discovered that almost two-thirds of those questioned hadn’t actually started saving into a pension fund yet.
Men aged between 18 and 35 were the most confident of their saving levels, with the average pension pot expected to be around £111,000. Women of the same age expected to have saved around £82,000 by the time they retired.
It seems that many young workers could be over-estimating their pension pots, particularly as more than half of 26-35 year-olds were not in a workplace pension. The number workers aged between 18 and 25 who were not yet paying into a pension was higher still at 65%.
With many younger workers prioritising saving to get on the housing market, it is unsurprising that the majority have yet to start saving for their retirement, but the money they do expect to save is also quite low considering inflation and the length of retirement which should span two decades for most.
Currently a pension pot of £100,000 will buy an annuity which will guarantee a retirement income of between £5,000 and £6,000 a year, but to build this pot up you would need to be paying contributions of around £120 a month for 30 years, or £70 a month for 40 years, calculated with an investment growth rate of around 5% each year.
The average amount paid into pension pots for workers aged between 18 and 35 is just £22 a month, falling well short of the target amount, and the same rate of savings over their career would only yield a pension pot of £18,000 over 30 years or £56,500 over 40 years.
The new single tier pension will offer a further £8,000 a year if the person qualifies for the full amount, having paid at least 35 years’ worth of National Insurance contributions, but many young workers will feel the pinch in retirement unless they take steps to start or increase their pension savings now.
The Government’s auto enrolment workplace pension scheme has gone a long way into getting more people saving for their retirement. Currently the scheme has around a 90% take up level, although this is expected to drop as more medium and smaller sized companies join the scheme.
Employees will be able to save between 0.8% and 4% of their salary into the pension scheme with their employers contributing between 1% and 3%.