Generation X is facing a financial cliff-edge in retirement, with 54 per cent having inadequate savings and two million with no housing or investments to fall back on in their later years, new research shows.
Workers face a “pension shock” in the coming decade, as they realise their retirement income is likely to be significantly lower than expected, the Social Market Foundation, a cross-party think tank, has warned.
It looked at those born between 1965 and 1980, who fall into a gap between two pension systems: they are too young to benefit fully from generous defined benefit schemes that provide a guaranteed income for life, but too old to have built up significant savings via auto-enrolment, which was introduced in 2012 when they were in their thirties and forties.
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Figures from the pension firm Standard Life show that 39 per cent of baby boomers are in a defined benefit scheme, compared with 22 per cent of Gen X. The Social Market Foundation surveyed 2,000 members of Gen X and found that 79 per cent were not aware of how much they had saved in their pension pot.
Catherine Foot from the Standard Life Centre for the Future of Retirement, a think tank, said this generation was “at the sharp end of a building retirement crisis”. She added: “While today’s retirees are better off than previous generations, this trend is set to go into reverse within the next decade and into the 2040s.”
Younger generations have more time on their side, but she warned the government’s pensions commission “must consider savings levels across society if we’re to avoid a repeat of the challenge now facing Gen X”.
It comes as The Times’s Smarter with Money campaign calls on the government to stop undermining savers’ confidence in their pensions by reversing a stealth tax raid on those who use salary sacrifice schemes to save for their retirement.
In her second budget last November Rachel Reeves, the chancellor, announced that she would cap the amount a worker can save into their pension under this scheme, tax-free, at £2,000 a year. The move, which will come into effect in April 2029, is expected to raise £4.7 billion for the Treasury in its first year.
Gen X is dangerously unprepared for retirement. The pensions consolidation firm Pensionbee said Gen X had a savings shortfall of almost £714,000 for a comfortable lifestyle in retirement, which includes a weekly meal out, a fortnight’s four-star holiday abroad plus UK weekend breaks and a replacement car every five years, according to analysis by the industry body Pensions UK. This doesn’t take into account the state pension.
This lifestyle is estimated to require an income of £43,900 a year after tax for a single pensioner, which means a pot of £878,000, assuming a 20-year retirement. Pensionbee estimated that the average Gen X pension pot was £35,387, which could grow to £164,104 by the time the saver was 67 if they continued working and making contributions, meaning a shortfall of £713,896. Those with aspirations for a moderate retirement would be £469,896 short of the £634,000 required.
In some parts of the country the gap is even worse — nearly half of Gen X in the northeast of England are projected to fall below the minimum retirement living standards, according to findings from the Social Market Foundation, compared with 19 per cent in London.
Gideon Salutin, chief economist at the think tank, said: “Despite many of them working longer than their parents and making more money than their parents, Gen X is in for a substantially worse retirement. Action is urgently needed. The Pensions Commission provides a perfect opportunity for change, but time is running out for Gen X. Unless policymakers make difficult decisions, the next wave of retirees looks likely to fall into inadequate retirements.”
It could become an increasingly political issue, with the research finding that the Reform Party had the highest proportion of Gen X voters vulnerable to pension shock.
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For those looking to shore up their retirements, a slow and steady approach can help. Maike Currie from PensionBee said Gen X had “become the backbone of the ‘sandwich generation’, supporting both ageing parents and dependent or returning children”.
“Faced with university fees, long-term care costs and mortgages, pensions often fall down the priority list,” she said. “The shortfall can seem daunting, but hope should not be lost. Even modest, consistent contributions, combined with careful planning, can grow significantly over time.”
Currie suggested members of Gen X could start with a full review of their pension plans and consolidate “fragmented pots” into a single place. Then to look to increase contributions and claim any available tax relief.