Gen X retirement - no one is coming to save you
UK Pension Crisis
It is said that the UK is facing a pensions crisis due to many working people not saving enough for retirement, people living longer and therefore needing a larger pot to sustain their retirement, investment returns in pension funds declining and the fact that many people have lost track of their old pensions from previous employers.
If, like me, you were born between 1965 and 1981, then you are defined as Generation X, the generation that followed the Baby boomers, which may mean we inherited a certain notion about how the world worked in terms of employment, buying a house, raising a family and retirement. For retirement specifically, the landscape has changed and although this impacts most private sector workers today, it has significantly impacted Gen X. There are some negative aspects of these changes but also some positive ones, which I’ll come onto later.
Among Gen X, one in three (31%) think it is unlikely that they will ever completely retire. This finding highlights the pressures faced by this ‘sandwich generation’, who may care for both their elderly parents and their own children, as well as needing to cover their own outgoings. This group also falls between older generations who had the benefit of lucrative final salary pensions before they started to be phased out at the turn of the century and those younger generations who are benefitting from auto-enrollment right from the start of their careers, from around 2012.
UK Pension History
Auto-enrollment into your company defined contribution scheme has only become commonplace in the last 10 to 15 years and although I think this is a fantastic initiative that will help many UK workers achieve their retirement goals in the future, many Gen Xers feel like they are playing catch up with regards to their retirement dreams, as many missed out on this opportunity at the start of their careers. This means that they didn’t benefit from the magic of compound interest which is so powerful the earlier you start investing.
As a side note and whatever your age, if you do have access to a workplace pension, you should absolutely stay enrolled in it as the benefits are like nothing else available to you. You pay into the scheme automatically each month, which you don’t even see, this is often the key to investing by paying yourself first and automatically, before the temptation to spend on anything else arises. Once you contribute, your employer will also contribute a percentage, which is a minimum of 3% currently, but some companies may offer more. This is FREE MONEY and you should absolutely take advantage of it. What’s more, the government gives you tax relief on your pension contribution, which ultimately means that if you pay in 5% of your salary, the government covers 1% of this. So you pay 4%, to get 8% paid into your pension in total, 100% return on your money is priceless so don’t miss out on that.
Over the past 25 years we have moved from an era of company controlled schemes (defined benefit pensions) where you paid in and your employers were responsible for what it was invested in, to an era today where all of the responsibility and risk has shifted to us, the employee. The problem here is that no one has educated any of us on this aspect and many workers in the UK today still believe that their employer is responsible for this and is doing a great job on their behalf, which unfortunately isn’t the case. No one is coming to save you!
UK Workplace Pension Schemes & Default Funds
This is where workplace pension schemes, and in particular the default funds within them, do have some major drawbacks that we need to be aware of and take action on. Most workplace schemes have a few default funds that you get to select from when you’re first enrolled as a new employee and they range from things like a cautious fund (low risk) to an adventurous fund (high risk). Essentially what this means is that the investments within the fund will be set up based on this selection of risk, low risk will often be something that has a lower amount of equities (company shares) and a higher amount of other less volatile investments, such as bonds (company/government loans). The higher the risk level the higher the amount of equities in the fund.
Firstly, what risk really means here is volatility, especially in the short term, so the price of equities move up and down more frequently and to a larger degree than something like bonds. However, over the long term, which is what a pension is designed for, equities outperform bonds and mean that your pension pot at retirement should be larger if you go for the more adventurous fund. Secondly, because most people haven’t been educated on what any of this means, they tend to go for a middle of the road balanced fund, just to be safe. However, if you are younger or trying to catch up, as most of Gen X are, then this might not be the best course of action for you.
The other issue with these default schemes is that they tend to have life-styling automatically applied to them, which means that from around 10 years from retirement age the fund automatically starts to de-risk and move to a bigger proportion of cash and bonds to try to protect you from high market volatility as you reach retirement age. This strategy goes back to when defined contribution schemes were first introduced and the only option available to you was to pass all of your money to an insurance company to buy an annuity which basically then paid you a sum of money every year for the rest of your life (like having a defined benefit scheme but not as favourable). Since 2015, however, more flexibility has been introduced to the system to allow us to continue to invest a large proportion of our pension whilst taking a small amount each year from it. This is really important as we may need our pension to last another 20-30 years and so being able to keep it growing in the market is a massive opportunity. Therefore, we might not want life-styling to be applied to our pension pot or if we do we might want it to only de-risk a proportion of our pot, not the whole thing.
Gen X are the generation being hit by this now as they look towards retirement. Not only did most of them come to the party too late, they have also had their money invested too cautiously and then de-risked too early, meaning that their pot has taken a considerable hit from all directions, leaving them with the possibility of having to work longer and potentially not having enough to retire and cover their basic needs.
Action Steps
Please don’t despair though, there are some things you can do to take action to repair some of this. Hopefully you are at the stage of life where you, and your partner if you have one, are earning the most you have in your careers and maybe you are also free from the responsibility and cost of raising children and maybe you are mortgage free. All of this allows you to be very aggressive with what you can invest into your pensions. You might be thinking ‘but what’s the point, it’s too late for me now’, but remember that retirement is a long period of our lives as we’re living longer now. We can keep this money invested and growing whilst we are in retirement, so any money you put in now is still only at the start of its growth journey over the next 20 or 30 years. Increase your contributions where possible, maybe by 1% or 2% or more per year as you get pay rises, and add bonuses if you get them.
Another thing you can do is to look for any old workplace pension schemes that you may have paid into over the years and look to consolidate them into a single SIPP (Self Invested Personal Pension). This will likely allow you to reduce the fees you are paying for those schemes and to select a higher growth fund than the default fund that you are likely in. It goes without saying that you should also look at the default fund that you are in with your current workplace scheme and get this working harder for you too. Having one SIPP at the point of retirement makes life admin easier for you too as you only need to worry about talking to one provider about how you access your pension rather than multiple providers.
Don’t forget about things like downsizing your home to release some equity, the state pension kicking in and maybe some inheritance at some point in the future, could all mean that your pension doesn’t have to stretch as far as you think.
Early access to your pensions is a benefit that wasn’t always available to older generations, nor was life longevity, so make the most of being able to retire early if possible and enjoy the youth of your senior years. Anxiety about pension savings is common amongst mid-lifers so if this is you then you’re not alone, but it is important to engage with it as soon as possible, be brave, take the first step towards financial freedom by taking control and becoming aware of your finances. It will take some time but step by step you will learn and feel empowered to manage your money with confidence which will allow you to dream about what your retirement plan could look like.
Maybe someone is coming to save you after all, YOU!
