Generation Game

Long-term saving could yield a £1m retirement pot for some millennials

The millennial generation don’t just spend their hard earned savings on smashed avocado and flat whites, but they do have a different attitude to money than older generations. In fact, some young people today or in future generations could accumulate a pension pot as high as £1 million[1] when they come to retire through a combination of higher earnings, a generous workplace pension and several decades of saving, according to new research.

The study was carried out in conjunction with the Pensions Policy Institute to look at what level of retirement pots younger and future generations could expect, based upon the current and proposed model for automatic enrolment. A 22-year-old median earner (peak earnings of circa £30,000 at age 40) in 2017 may be able to build up a pension pot of £108,000 with minimum scheme contributions levels. Those with higher earnings and in a more generous workplace scheme could build up a substantially bigger sum.

Reducing the age limit
The study also found that changes proposed in the Department for Work & Pensions’ Automatic Enrolment Review, including reducing the age limit and removing the lower limit of eligible salary, could lead to a 32% increase in fund size for a median earner who starts saving at age 18.

The impact of the introduction of automatic enrolment on future generations focused on young people who were aged 22–35 by the end of 2017 – i.e. those who entered the workforce during the initial implementation of auto enrolment in October 2012 and the first generation likely to spend their entire working life in pension schemes into which they were auto enrolled.

Automatic enrolment has almost doubled the participation of 22-29-year-olds saving into pensions, according to the research.

Using four hypothetical individuals in the younger age group with different salary circumstances, the research shows how:

Stopping saving – even close to retirement – can significantly damage retirement outcomes
A wide range of possible pension pot values can result, depending on the quality of the workplace scheme and the level of contributions made by employer and employee
The triple lock has a proportionally larger impact on lower-earning millennials than higher earners

Improving financial futures
The research demonstrates that bringing people into savings at a younger age and increasing the contributions made can significantly improve their financial futures. Now that nearly 10 million people have been auto enrolled into a workplace pension, we’ve moved to a stage where it’s time for savers to think about what they’ll get back at retirement and consider any additional steps they may want to take along the way to build up their life savings.

Millennials are likely to be the first generation to benefit fully from the introduction of automatic enrolment, with the opportunity to have an employer contribution and government contribution paid into a workplace pension scheme throughout their working life. This means that automatic enrolment has the potential to make a significant difference to later life for millennials, providing more options and a more secure foundation for funding retirement.

Source data:
[1] Based upon an example of a female saving from 18 to State Pension Age into a workplace pension contributing 16% of total earnings, deemed to be a 90th percentile earner (peak earnings of circa £49,000 at age 40). All figures in the research are in 2017 earnings terms.

PENSIONS ARE A LONG-TERM INVESTMENT.

THE RETIREMENT BENEFITS YOU RECEIVE FROM YOUR PENSION PLAN WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE VALUE OF YOUR PLAN WHEN YOU DECIDE TO TAKE YOUR BENEFITS, WHICH ISN’T GUARANTEED, AND CAN GO DOWN AS WELL AS UP.

THE VALUE OF YOUR PLAN COULD FALL BELOW THE AMOUNT(S) PAID IN.