Born between 1965 and 1980? Your pension is probably ‘inadequate’

More than half of Generation X – those born between 1965 and 1980 – are heading for an “inadequate” income in retirement according to a report.

The paper from the Social Market Foundation (SMF) says that many of this generation, aged between 46 and 61, will face a shock when they reach retirement age.

A survey of 2,000 people across the UK found that 54 per cent of Gen Xers were projected not to meet a benchmark known as the target replacement rate.

The replacement rate shows what proportion of their working income someone can expect to receive in retirement, and the target ranges from 80 per cent for low earners, to 50 per cent for higher earners.

Meanwhile, 39 per cent of Gen X are set to fall short of maintaining their current standard of living, the survey found.

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It means that 7.5m Gen Xers are facing a significant decline in their living standards when they hit retirement.

But many are not prepared for this. Half of survey respondents said they expected a higher income than they were projected to receive.

Why Gen X face an ‘inadequate’ retirement

A key reason why Gen X is set to face financial difficulty in retirement is because of a shift in the pension landscape during their working lives.

Before the 1980s, many workers had access to what is known as defined benefit (DB) pensions. These provide workers with a fixed annual income for life in retirement. Workers did not save into a pot.

The SMF report says: “In the 1980s and 1990s, increases to life expectancy, declining returns, and shifting regulations increased calls among employers to decrease their responsibility for private pensions.

“This led them to replace DB pensions, which guaranteed retirement income based on salary and
years of service, with defined contribution (DC) pensions.”

DC pensions require savers to put money into their own pots. These pots are invested and grow, and it is the responsibility of the saver to make the money last during retirement.

As a result, they require more engagement from savers. Nowadays, there is a rule known as auto-enrolment, which means employers must automatically enroll their staff into one of these pensions. But this rule was not introduced until 2012.

Gideon Salutin, chief Economist at the Social Market Foundation, said: “Gen X is approaching retirement caught between two pension systems. Many were too late for generous defined benefit schemes and too early to benefit fully from auto-enrolment.”

Gen X and worried you don’t have enough saved? Here’s what to do

If you are in Gen X and are worried that you are not saving enough for retirement, there are actions you can take.

The first of these is increasing your workplace pension contributions. Under auto-enrolment rules you pay 5 per cent of your earnings into a pension, and your employer pays 3 per cent. Many employers will increase this though.

Sir Steve Webb, ex-pensions minister and now partner at LCP said: “One way to make up for lost time is to look for ways to boost your workplace pension.

“In some workplaces, an employer will match any additional contributions you make, subject to an overall limit, and this effectively doubles the value of your contribution. It is well worth finding out if your employer does this and, if not, ask them to consider it as a workplace benefit.”

Another way to boost your retirement income is to ensure you have access to the full state pension.

To get the full new state pension – roughly £241 per week from April – you typically need 35 qualifying years of national insurance (NI) contributions.
 
These qualifying years can be earned by paying NI through work or by receiving certain benefits. If you have a gap in your record, you can pay to top up some of those years.

You can check your NI record on the Government website to see how many years you already have, and you can pay voluntary contributions for up to the past six years. The cost depends on the tax year you’re paying for.

If you’re worried about making your pension last in retirement, you can also speak to experts about how to use your pot – whether that be drawing money from it in retirement or buying an annuity, which gives you a pension income annually.

Rachel Vahey, head of public policy at AJ Bell, said: “From age 50, people can ask Pension Wise for a guidance appointment to give them more information on their pension options. Or they can ask a financial adviser for some help at this important juncture.”