Today's twentysomethings can expect to retire in their 70s. A good reason to postpone saving for the prospect? Quite the opposite.
3:24PM GMT 06 Dec 2011
13 CommentsYounger people probably didn't pay much attention to George Osborne's announcement last week to raise the state pension age from 66 to 67 from 2026, eight years earlier than planned.
But they should. Based on the principle the Government had previously set out of increasing state pension age in line with improvements in longevity, accountants at PwC calculate that the state pension age could be set to rise to 70 by 2050.
It means that anyone under the age of 30 will have a long wait before they can get their hands on the state pension.
If you've just finished university and are about to start your first job, you're probably not thinking too much about how you will fund your retirement.
To be fair, dealing with student debts, buying your first home and thinking of starting a family are likely to be foremost in your minds. But ignoring any thought of pension provision suffers from a fatal flaw: if you don't start saving for retirement until you're middle aged, you have left it too late. You will never be able to catch up with where you would have been if you'd started earlier.
Here we explain why this is so, and suggest how those in their twenties can go about preparing for later life without sacrificing their more immediate goals.
I'M ONLY 20. SURELY I DON'T HAVE TO THINK ABOUT PENSIONS FOR AGES?
Starting to build those savings now will make the process a lot less painful.
You may have to rely on your savings for the last 20 years of your life – even if, as expected, we are retiring in our seventies by then. If you don't start saving for retirement until your fifties, you have just two decades to save enough money to last another two decades.
You don't need to be a financial expert to see that that's a very tall order. Something would have to give – either those last years of your working life would see a drastic fall in your living standards, or you would fail to save enough and face an impoverished retirement if you stopped working at the normal age. Many people would simply be forced to work longer.
If makes far more sense to use all five decades of your likely working life to save up the money to fund your final 20 or 30 years.
If you start saving at the age of 20 and put away £75 a month for your entire working life, your savings should produce an income for life of about £17,000 at retirement. Delay until 50 and the same monthly savings will produce an income of about £2,000. Even putting it off until the age of 30 would cut your likely income to £8,850.
Starting early doesn't just mean that you will save for longer. It also gives your investments longer to grow, and you earn interest on the interest. Experts call this "the miracle of compound interest" because it makes a huge difference to total investment returns.
"Saving for retirement is like a diet: what you do day in, day out over a long period is more important than action in fits and starts," said Steve Bee of Paradigm Pensions, a consultancy.
BUT SURELY THE STATE PENSION AND OTHER BENEFITS WILL GIVE ME AT LEAST A GOOD START?
Don't count on it. For one thing, the Government plans to sweep away means-tested benefits for pensioners and replace them with a flat-rate weekly pension of £140 for all. The state's top-up pensions, which paid an income linked to your earnings, are being abolished.
"Given the demographics, there is no reason to think support from the state in retirement will be anything other than at subsistence level," Mr Bee said.
SOUNDS SCARY. SHOULD I START A PENSION RIGHT NOW?
Start saving now, most experts suggest – but not automatically in a pension. In many cases, saving in Isas instead is just as good to start with – and Isas have the extra benefit that you have access to the money if you need it.
John Lawson, a pensions expert at Standard Life, said: "If you're young, saving into anything is good – Isa or pension.
"Pensions are a wonderful discipline but for a basic-rate taxpayer who has no problem maintaining the savings habit, an Isa is fine. You can always transfer to a pension later – in fact if you delay doing this until you're a higher-rate taxpayer, you will actually benefit."
But if you are offered a workplace pension, take it. Within the next few years, every company in the country will have to offer a pension – and enrol employees automatically. The total contribution from you, the company and government tax relief will be at least 8pc.
"You'd be daft to opt out of this auto-enrolment scheme," said Mr Lawson. "You will get a minimum 3pc contribution from your employer."
Ros Altmann, the director general of Saga, agreed that changes to state pensions and the death of final salary schemes meant that the new generation of workers would be "thrown back on private sources of income".
But she added: "Pensions are not the only answer. You could work longer, use your house to fund retirement, run a business and sell it, or take out a range of Isas. The 'pensions or nothing' idea has to change."
WOULDN'T I BE BETTER OFF PAYING BACK MY DEBTS FIRST?
It may seem crazy to save for retirement when you could use the money to cut your debts. But it's not a clear-cut decision – look at the interest rates you pay before deciding.
"If your debts are expensive, such as on credit cards, pay them off first," Mr Lawson said. "But if it's a mortgage or cheap personal loan, there's no reason not to save at the same time. If I'd waited until I was completely debt free before I started saving, I still wouldn't have a pension. You'd be crazy to make 'don't save before paying off debts' your mantra."
Mr Bee said: "Should you save at the same time as paying off debt? Yes if you get a workplace pension. If you opt out, you are adding to your burden in later life – effectively increasing your debts."
HOW MUCH SHOULD I SAVE?
Young people who want to retire on half their final salary will need total pension contributions of 10pc-15pc of earnings throughout their working lives, Mr Lawson said.
So top up your auto-enrolment contributions to about 9pc to get the total to that level. Ms Altmann said conventional wisdom put contributions at 20pc of your salary.
