Too young to have enjoyed a generous final-salary pension and too old to have properly benefited from the automatic workplace saving scheme: the middle-aged have a pension problem.
Generation X, those aged roughly 45 to 60, are dangerously underprepared for retirement, with an estimated savings shortfall of up to £713,896, according to the Department for Work and Pensions (DWP). But they still have time to rescue their retirement — adding even small extra amounts to your pot in your forties and fifties can make a big difference to the lifestyle you can afford in later years.
Often referred to as the forgotten generation, Gen X savers have endured a lifetime of poor timing. Many started working during an economic downturn in the early Nineties, and then suffered big financial shocks including the dotcom crash in 2001 and global financial crisis of 2008. That has put them at risk of redundancies, stagnant wage growth and, at times, high interest rates. As they reached their peak earning years — typically in your forties — the Covid 19 pandemic arrived.
Gen X is also more likely than previous generations to be supporting ageing parents and young children, or older children who have returned home, at the same time. This puts further pressure on the family finances and makes it harder to save for the future.
Maike Currie from the pension firm PensionBee said: “Generation X has been squeezed from every angle, sandwiched between caring for ageing parents and supporting children, all while weathering repeated economic shocks. It is little wonder that pensions have slipped down their priority list.”
But this demographic is also a victim of changing pension policy. Most were too late to be enrolled into defined benefit (DB), also known as final-salary pension schemes, which pay a guaranteed income throughout retirement.
In 2000 DB schemes had 9.1 million members, according to the pension firm Standard Life, but only 6.8 million by 2012. Some 39 per cent of baby boomers are in a DB scheme compared with 22 per cent of Gen X, it said.
And by the time auto-enrolment came along in 2012, ensuring that all workers aged 22 and over earning at least £10,000 a year (£8,105 when the system started) were put into a workplace savings scheme that employers had to contribute to, Gen X were too old to reap as many of the benefits.
According to the DWP, the average Gen X saver was auto-enrolled at age 42. Those joining the workforce today will enjoy 20 more years of pension saving.
Mike Ambery from Standard Life said: “People in their forties and fifties were caught in the gap in our pension system. As they approach retirement, they are clearly concerned about the impact this might have on their lifestyle.”
How big is the problem?
The DWP said those who will reach state pension age in the 2030s and 2040s were most likely to be undersaving. This is Gen X.
It analysed the extent of undersaving compared against the retirement living standards, a set of guidelines compiled by the industry body, Pensions UK, as an indicator of the income you will need to afford various standards of living in retirement.
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A moderate retirement lifestyle, which includes a £56 weekly food shop, a fortnight’s holiday overseas once a year and about £1,550 a year on clothing, requires a post-tax annual income of £31,700 for a single person, including the full state pension and assuming no housing costs. The DWP said that 76 per cent of those due to retire in the 2040s were not saving enough for this, compared with 73 per cent across all age groups.
Some 91 per cent of Gen X are not saving enough for a comfortable retirement lifestyle. This would include a four-star overseas holiday and three weekend UK breaks a year, £75 a week for groceries and a weekly takeaway. Pensions UK says this would require an annual income of £43,900 for a single person.
How big a pot do you need?
The average Gen X pension pot is worth about £35,387, according to the savings consolidation firm PensionBee, with men saving more (an average of £43,597) than women (£27,177).
Pension Bee estimated that the average £35,387 pot could reach £164,104 by the time the saver was 67 if they continued working and making contributions. This assumes an average salary, annual wage of growth of 1 percentage point above inflation, and annual investment growth of 6.5 per cent.
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But that still leaves a shortfall. Pension UK’s minimum lifestyle requires a pot of £268,000, PensionBee said, assuming a 20-year retirement — some £103,896 more than the projected Gen X pot. Those with aspirations for a moderate retirement would be £469,896 short of the £634,000 required. Anyone hoping for a comfortable lifestyle should aim to save £878,000, Pension UK said.
How to rescue your retirement
A small, slow and steady approach can help those who are worried that their pension pots will not be enough. A 45-year-old with the average Gen X pension pot of £35,387 could have about £294,500 by age 67 if they saved £250 a month, assuming annual investment growth of 6 per cent and contributions increasing by 2 per cent a year. Those able to contribute £400 a month could grow their pot to £392,000.
If you are still working, this will include contributions from your employer. Under auto-enrolment, workers must contribute a minimum 5 per cent of their salary and their employer 3 per cent, but many are more generous and will match your contributions up to a certain level, so it is worth asking.
Other weapons in your pension armoury
Those able to save more can make use of carry-forward rules, which allow you to use pension allowance from the previous three tax years. You are allowed to save up to £60,000 a year, or 100 per cent of your earnings (whichever is lower) into a pension and still benefit from tax relief, meaning that those who have saved nothing for three years could put up to £180,000 into their pot.
Higher-rate taxpayers should check whether they need to claim extra tax relief on their pension contributions using a self-assessment tax return.
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Basic-rate tax relief of 20 per cent is automatically applied to pension contributions, which effectively means that when you pay in £80, it is topped up to £100. Higher-rate payers get 40 per cent tax relief, but depending on the type of scheme you are in, may have to claim the extra 20 per cent. Failing to do so can impact your pot significantly. It is estimated that £1.3 billion in pension tax relief has gone unclaimed over the past five years.
Review your investments
Many pension funds automatically move your money into less risky assets as you get nearer to retirement age (known as lifestyling), but if you are planning to work longer or leave your money invested, this could mean missing out on vital years of extra investment growth.
Check your fees
Someone investing £200 a month for 40 years would have £263,092, assuming annual growth of 6 per cent, with fees of 1.5 per cent. Reducing the fees to 0.75 per cent would boost their pot to £316,928.
Investment platforms such as Hargreaves Lansdown and AJ Bell offer a range of ready-made fund options, which invest according to different risk levels for those who do not want to choose their own investments. The Vanguard Lifestrategy range of funds is a popular option for those who want to keep fees down. These funds invest in a mix of shares and bonds according to different risk levels, and charge about 0.22 per cent.
Track down old pension pots
Pensions UK estimates that there are 3.3 million lost pots worth an average of £9,470 each. The government’s pension tracing service is a database of pension scheme details that can help if you do not have old paperwork and don’t know which pension firm you have been saving with.
Consider consolidating your pots — having everything in one place makes it easier to manage your savings. However, anyone with a final salary pension should take professional advice before moving it.
Ambery said: “It is not too late for Gen X to make positive steps to boost their financial future. Small moves like tracking down old pension pots, seeking advice and guidance, and increasing contributions if possible, could make a real difference to their standard of living in retirement.”
‘Pensions were never something I thought about’
Renee Morgan, 52, from Telford, Shropshire, has about £18,300 in pension savings and she is worried about retirement. She hopes she will be healthy enough to keep working at her job in a factory past state pension age so that she can keep saving.
Morgan started paying in to a pension at the age of 40 in 2013, after auto-enrolment was introduced. When she changed jobs three years ago, she increased her contributions, which her employer matches.
Renee Morgan: “Pensions were never something I thought about … before I knew it, retirement was on top of me.”
RENEE MORGAN
“Pensions were never something I thought about, and not something that was talked about at work. Before I knew it, retirement was on top of me,” she said.
Morgan’s mother died this year and she hopes to invest some of her inheritance into her pension. “I’ve worked since I was 15 and don’t live a luxurious lifestyle. It’s not right that you have to rely on an inheritance to fund your retirement,” she said.
Morgan keeps a close eye on her pension and is pleased with how it is growing, but knows she doesn’t have enough. She also rents, which means that housing costs will have to be factored in when she stops working.
She tells her three children, aged 26, 27 and 30, to start saving as soon as possible. “They look at me like I’m mad when I tell them to put in a bit extra,” she said. “I tell them: I was like you and now I regret it.”