Britain’s intergenerational divide deepens as young adults look set to be worse off in retirement than their predecessors.
The vote to leave Europe perhaps captured the nation’s fractured mindset perfectly. Relatively few young adults voted for something that could ultimately deny them an automatic right to live and work in the EU. Moreover, their collective viewpoint stood in stark contrast to that of older generations, for whom issues of identity seemed to trump economic concerns.
Generational divides were once drawn along cultural and social lines. Baby boomers seemed to go against everything their parents had believed, in terms of music, fashion and philosophy. But nowadays the divide between old and young is just as likely to be denoted by expectations of wealth and prosperity.
Today’s 18–21-year-olds enter the workforce at a time of austerity, soaring house prices, student debt, and low wage growth. Even on optimistic scenarios it looks likely that they will make much slower progress on pay than their predecessors, challenging the notion that each generation will do better than the last.
Recent research from the Resolution Foundation has found that a typical millennial1 earns £8,000 less during their twenties than those in the preceding generation – Generation X.2 Without real-term wage growth, a significant number of millennials have all but given up the idea of ever owning their own home. This is a particular source of discontent, especially as their own parents bought the family home relatively cheaply, and then locked in sizeable gains.
Meanwhile, older generations continue to see their retirement incomes rising. Prudential says that people planning to retire in 2016 expect to have an average income of £17,700 a year, the highest figure it has ever recorded.3
Indeed, perhaps nowhere is the generational divide more apparent than in the prospects for retirement. Younger workers are much less likely to have access to final salary schemes, and the starkly different contribution rates for those schemes compared with defined contribution pensions have obvious implications for the share of wealth across generations.
To compound the problem, ‘twentysomethings’ are starting their careers at a time when their pay is being supressed by firms plugging deficits in their final salary schemes that, in the main, protect benefits for older workers. This means less investment capital to help businesses grow, and less money available to invest in the pensions of younger workers.
According to research from insurer Aegon, those aged 16 to 24 are hoping to retire with an average annual income of £64,000 a year, nearly six times the average income they are on track for. This aspiration comes despite the fact this would require a savings pot of nearly £1.9 million, a sum significantly greater than the pension lifetime allowance.4
Such expectations would be more realistic if more young savers were willing to take on investment risk, but in separate research from Scottish Widows, a staggering 51% of 18–29-year-olds believe cash savings will help support them, despite the experience of an ultra-low interest rate environment for much – if not all – of their adult lives.5 By saving their money rather than investing it, they could be missing out on potentially life-changing sums at retirement.
“I think younger generations understand that they could spend two to three decades in retirement, but they don’t necessarily understand the financial commitment required,” says Ian Price, Divisional Director at St. James’s Place.
Yet despite the gloomy prognosis, he believes there are reasons for optimism.
“Younger generations have very long-term investment horizons and greater opportunities to benefit from compound growth,” says Price. “Understandably it’s hard when you’re trying to get on the housing ladder, or pay off student debt, but investing into your pension early and often could make a huge difference by the time you reach retirement.”
The government hopes to plug the pensions gap through automatic enrolment – a scheme that places workers over the age of 22 and earning more than £10,000 into a workplace pension scheme by default. Although minimum contributions are currently a long way from being able to provide for a comfortable retirement, auto-enrolment should lead to better engagement with retirement planning.
Aside from the government’s efforts to tackle the issue of falling pension scheme membership, some families are starting to consider how to use their combined resources in the best, most tax-efficient way to benefit younger members. This may be to help them gain a foothold on the housing ladder, clear debts, or build a pension. But with the right advice and planning, transferring wealth to the next generation can be extremely rewarding in all these cases, offering simple ways reduce a future Inheritance Tax liability.
“We must ensure that younger generations are getting a fair share of the proceeds of economic growth so that we don’t end up with a society where the retiring population is poorer than the generation that went before,” adds Price.
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1 There is no agreed standard on which years of birth fall into the ‘millenial’ category, but a 2016 report by Goldman Sachs defines millenials as those born between 1980 and 2000: http://www.goldmansachs.com/our-thinking/pages/millennials/
2 Stagnation Generation: the case for renewing the intergenerational contract, Resolution Foundation, July 2016
3 ‘Class of 2016’, Prudential, 15 January 2016
4 Aegon.co.uk, 5 August 2015
5 Retirement Report 2016, Scottish Widows, September 2016