Young pension savers urged to invest 18% of earnings

Young pension savers must invest 18 per cent of earnings according to a new report

Financial planning in association with Scottish Widows bannerA new report from the International Longevity Centre think tank claims the current UK pensions system is ‘sustainable but inadequate’ and that young pension savers face a huge challenge to set aside enough for retirement

Britain’s young pension savers face a ‘monumental savings challenge’ requiring them to set aside 18 per cent of earnings each year to achieve an adequate income in retirement.

These are the findings of a new report from the International Longevity Centre (ILC-UK) – a policy think tank focussed on the challenges facing government and society arising from demographic change.

The Global Savings Gap report investigated the pension systems of 30 high income countries and regions – ranking them on factors including affordability, adequacy and intergenerational fairness.

While the 18 per cent figure was suggested for an ‘adequate’ income in retirement, the publication adds that some 20 per cent of income should be invested if today’s young pension savers are to match the income enjoyed by the current generation of retirees.

The report identifies factors including low investment returns and interest rates, faltering economic and wage growth and the steady decline of defined benefit schemes as responsible for ‘a hostile economic environment’ within which it will be challenging to build pension pots.

“The combination of persistently low returns, sluggish wage growth and a changing labour market means today’s young people will need to save more to enjoy their retirement,” said Dean Hochlaf, assistant economist for ILC-UK.

“The government must do more to extend pension coverage and ensure that contributions towards private schemes are sufficient, especially amongst overlooked groups such as the self-employed and those on low incomes who have yet to benefit from initiatives designed to improve private savings”.

The report also examined savings behaviour across five nations via a survey from Ipsos MORI and found that only 12.4 per cent of people in the UK are saving more than 15 per cent of earnings.

It also discovered that over 30 per cent of people between the ages of 25 and 44 make no savings whatsoever and that fewer than one in 10 had a specific savings target for retirement, compared to around a third in the US and Singapore and over half in Hong Kong.

The report added that “auto-enrolment has proven effective in increasing private pension coverage in the UK, but people are still not saving enough. Government must consider whether to harness the ‘nudge’ approach to support higher contributions.”

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