The International Longevity Centre UK recently reported on an issue affecting a considerable proportion of “Generation Xers.” Many 40 to 55-year-olds, otherwise known as Generation X, seem to have gaping holes in their pension plans. If you were born between 1965 and 1980, that could well be you. Here, we explore what exactly that problem is, why it has transpired and what Generation X can do about it.
What problem does Generation X have in the future?
Several issues have made it difficult for Generation Xers to save for their pension. While many have made some inroads in setting aside money for retirement, many haven’t. Those that have often have not set aside enough.
The result is that many Generation Xers will have to work far past retirement age and continue to do so for an unknown amount of time. Others are relying on their state pension to get by. Given that the State Pension is a paltry £175 a week, many Generation Xers will not have the retirement of their dreams!
Why Generation X are vulnerable to pension deficits
Highly changeable salaries and expenses
Generation X has been through a lot. The credit crunch occurred when many were just starting to get into their career stride, limiting their earnings potential. Guaranteed pay rises were no longer the norm. Now, the pandemic will be affecting jobs and depressing salaries for a long while yet.
Additionally, Generation X are at the whim of some hefty expenses that previous generations are not. Childcare costs, for instance, are high, and mortgage payments are too - despite low interest rates. Houses prices have increased at such a pace, and take-home pay has not kept up.
Another hangover from the credit crunch has a two-pronged effect on Generation X - and thus minimises their ability to save into a pension pot. Many accrued high debts. In the run-up to the credit crunch, doing so was encouraged as it was seen as the norm. However, it left debtors with little to put aside into savings.
Additionally, since the credit crunch and the collapse of interest rates, the UK population has been encouraged to spend. The amount of cheap credit almost makes borrowing free in some instances. However, it still means individuals have debt, further diminishing their ability to put money into a pension pot.
Lack of savings
In conjunction with having high debt, many Generation Xers will not have any savings to speak of. Not only has that Generation been perpetually encouraged to spend for almost 15 years now, but they also have had very little incentive to save. Low interest rates have meant that banks have been offering paltry returns on savings accounts for over a decade. The result is that for too long, Generation Xers have not been using them as the returns were not, and are not, worthwhile.
What can Generation X do about the problem?
It is all very well identifying the problem that Generation X have with pension deficits, but if you’re in this situation, what can you do about it? You may be like many others, relying on future inheritance or improved salaries to fill any holes. While that may be a workable solution for some, it won’t be for all. Instead, you can do the following:
Enter a defined contribution scheme
While starting to save as early as possible is always recommended, that does not mean it is meaningless to start saving later in life. One of the best ways a person can do so is by entering into a workplace pension scheme. There are policies in place now that mean all employees earning over £10,000 a year with a company must be auto-enrolled in a pension scheme. A company must then pay an extra 3% of a person’s salary into their pension pot. Then, the employee must make a further 4% contribution, with tax relief providing an additional 1%. So if you can pay into one of these schemes, do. However, if you are not eligible for one, find a private pension that you can regularly pay into instead. Even paying a small amount each month can make a big difference come retirement day.
Talk with a pension advisor
Talking with a financial advisor will mean that you can identify how big a hole you have in your pension. Your advisor will tell you how much you need to save each year to afford the lifestyle you want come retirement day. Talking with an advisor in this way will mean that you will be much clearer on your options. You will know what changes you have to make to be able to make the savings you require.
Make use of tax-efficient savings schemes
One of the aspects a pension advisor will guide you on is the full use of any tax efficiencies you can make to optimise your pension savings. Paying into a pension scheme attracts tax relief. Meanwhile, paying into Cash ISAs or Stocks and Shares ISAs also benefits from any interest earned being tax-free.
Retiring as part of Generation X
Perhaps one of the main problems that Generation X faces is that they feel too old to do anything about the situation. However, burying heads in the sand will not solve the problem in any way. Relying on working much later into retirement or on a State Pension is not practical either. Ill health and old age make working later untenable. The State pension is simply not enough for many people to sustain the quality of life they aspire to. Instead, Generation X needs to tackle the problem head-on. Undoubtedly, difficult decisions may need to be made. However, by working with a financial advisor, salvaging what can be saved from the situation is possible.