The question of which generation will be worse off in retirement – and how fairly the burden is being sharing – has surged to the top of the political agenda
Millennials and Gen Z face the most uncertainty, with long-term rental costs threatening to eat into their finances.
But it is Generation X – those born between 1965 and 1980 – who experts warn face the biggest “shock”.
Many will be squeezed by the decline of generous workplace pensions and a higher state pension age, experts say.
The question of intergenerational fairness is under fierce debate after Andy Burnham proposed reforming the triple lock last month.
Currently, it rises by whichever is higher of 2.5 per cent, inflation or average earnings growth.
But from 2030, the state pension will rise by at least inflation or 2.5 per cent each year – with a new link built in to keep pace with earnings over time.
Meanwhile, the second Pensions Commission is assessing how to build a fair and sustainable system by 2050, which includes making sure people have adequate savings to see them through retirement.
Commissioner Baroness Drake said her mission is to “finish the job” started by Adair Turner, the chair of the first Pensions Commission in 2005, which laid the foundations for the UK’s automatic enrolment system.
Auto-enrolment requires a minimum contribution of 8 per cent of qualifying earnings into a workplace pension, including at least 3 per cent from employers. But it is understood the commission is considering recommending raising this to 12 per cent from the next Parliament to help people save adequate cash for their retirement.
With fresh policies and various implementation timelines at play, it can be confusing to look ahead to make sure you are saving enough – no matter how old you are.
20s: Never too early to save
People in their 20s should start saving early to ensure they are building up a strong private pension fund, which will protect against long-term housing costs and future policy changes.
The Pensions Commission interim report warned that ‘Generation Rent’ faces “higher housing costs than any generation of pensioners before”, with the number of non-homeowning pensioners expected to grow. The current system was designed at a time when many people had paid off their mortgage by the time they retired.
Patrick Thomson, head of research at the Standard Life Centre for the Future of Retirement, urged people in their 20s to “get into the savings habit early and stay there”, ensuring they are making the most out of their workplace pension scheme.
Young people face the “greatest long-term uncertainty” over pensions policy, he said, with future governments expected to face difficult choices over raising the retirement age, scrapping the triple lock and even potentially means testing the state pension.
Rachel Vahey, head of policy at the investment platform AJ Bell, said: “Many may doubt the state pension will still be there for them – or fear they will be well into their 70s before they receive it.
“An ageing population and a shrinking workforce will only intensify the pressure.”
30s: Get serious about saving
Those in their 30s will have to consider saving for their pension against other financial pressures like housing and childcare, experts have warned.
This is a decade of “big financial decisions”, Vahey said, with many prioritising getting onto the property ladder over saving for retirement.
“But even if pension saving has taken a back seat in people’s minds, automatic enrolment has quietly been doing the heavy lifting,” she said. “Starting early is one of the biggest drivers of retirement wealth, giving this generation a solid foundation to build on.”
Thomson agreed that 30-somethings still have the advantage of time, meaning there are “decades over which contributions and investment growth can build”.
Think tanks and sector leaders have long called for the total pension contribution rate to rise gradually to 12 per cent – with employers contributing 6 per cent – to help people build up their retirement savings.
Younger generations would have the most to gain from this, but would have the most to lose if changes come without enough notice.
40s: Biggest shortfall in retirement cash
The Pensions Commission has identified Generation X – now aged 46 to 61 – as the age group at greatest risk of inadequate retirement incomes. Around 46 per cent of this cohort is projected to fall short of retirement income targets, which is slightly higher than people born earlier and later.
This generation is also set to see upheaval from the state pension age rise from 67 to 68, which is due to happen gradually between 2044 and 2046, firmly affecting people in their 40s.
However, the Office for Budget Responsibility, the government’s official forecaster, expects the move to 68 could be brought forward by seven years to 2037-2039 to ease pressure on the public finances. This is not Government policy and a review is under way.
Vahey, from AJ Bell, said this generation must “prepare for the real possibility of waiting until 68” for the state pension. However, those in their 40s will have longer to prepare for this change, for example by increasing their auto-enrolment contributions.
She said 40-somethings should still receive a state pension underpinned by the triple lock, but Burnham’s plan to dilute it from 2030 means that they “cannot bank on today’s generous increases continuing”.
Vahey added that housing has “split” this generation, with those who got onto the housing ladder early able to build wealth, while those locked out facing “relentlessly rising prices”.
50s: Most likely to feel a ‘shock’
The upper end of Generation X will have less time to adjust financially to policy changes, with any move to fast-track the state pension age rise to 68 set to “land squarely on those in their early 50s today”, giving they less time to prepare.
This cohort is also most likely to have missed out on old-style defined benefit pension packages, while having less time to build up lifetime savings via the auto-enrolment scheme.
“Born a decade earlier, many might have had one; born later, they would have had more time to build up savings through automatic enrolment. Instead, they risk being caught in the middle,” Vahey added. However, they are still set to benefit from a state pension strengthened by years of the triple lock.
Thomson, from Standard Life, said this generation could be in for a “shock”, adding that future policy changes should be accompanied by employment support and financial help for those unable to keep working.
He said this group should “take stock” now by developing a plan for retirement or thinking about how they can adapt their career to work for longer, such as going part time or changing role.
60s: Prepare for retirement
People in their early and mid 60s have less time to adjust their savings but greater certainty over when they will retire and what they can expect to receive.
Many will be watching the Budget on 28 October for potential policy changes that could affect their income.
The Government has already confirmed this will include preventing low-income pensioners from falling into the income tax threshold. Because of the triple lock, the state pension is set to climb to more than £13,000 a year in April, putting it above the income tax personal allowance of £12,570 for the first time.
However, there could be changes to how people can access their private pensions. One proposal is to cut the size of the tax-free lump sum people can take from their pensions, which is either 25 per cent of the amount or £268,275 – whichever is lower.
Another idea is to limit pension tax relief. If you pay into a pension, you receive relief at whatever income tax rate you pay, so higher-rate payers get more generous tax relief.
A DWP spokesperson said: “The Government recognises that millions are not saving enough for their retirement. That is why last year we revived the Pensions Commission to review our pensions system as a whole, for the next Parliament.
“The Commission is examining how we can ensure secure retirements for tomorrow’s pensioners and it will publish a final report and recommendations in February 2027. We will respond swiftly in the Spring”.