Millennials to have similar pensions to baby boomers
Young adults will have retirement incomes similar to today’s pensioners, according to analysis which rejects widespread pessimism about the financial prospects for millennials.
Men in their 40s will suffer a fall in their retirement incomes compared with today’s pensioners, but the generation behind them will see their incomes recover, analysis by the Resolution Foundation found.
It said the average pension for a man will be about £310 a week in 2020, taking into account state and private pensions. This will fall to about £285 in the mid 2040s in real terms “before building again to about £300 a week by the end of the 2050s”.
For women, there will be no dip in pension income but a small improvement over time. The thinktank forecasts that average pensions incomes for women, typically lower than those of men because of lower pay and career breaks, will be about £225 a week in 2020, then rising to about £235 by the mid-2030s and staying at that level going forward.
The analysis defies the popular view that today’s pensioners are a “golden generation” who benefited from final-salary pensions. It said that while pensioner incomes have risen sharply this century to match or even surpass those of working people, these levels can be broadly maintained in the future.
The upbeat assessment is in sharp contrast to other a stream of reports which paint Britain’s pensions as among the worst in the developed world, with young workers facing penury in retirement. Resolution said “auto-enrolment”, the government scheme in which workers are automatically defaulted into paying into a private pension scheme, will be the chief driver behind a recovery in pension income.
But the thinktank acknowledged that today’s younger generation are unlikely to build up the housing wealth acquired by baby boomers – people born between the early 1940s and mid-1960s – from the huge increase in house prices, and will not be entitled to a state pension until they are older than the current generation of retirees.
David Finch, senior economic analyst at the Resolution Foundation, said: “Rising pensioner incomes has been one of the biggest living standards success stories this century. And yet retirement is second only to housing in terms of causes for concern for young people’s prospects.
“But these fears are overdone. Millennials are on course to enjoy similar levels of retirement income to today’s pensioners, largely thanks to the success of auto-enrolment in getting them to save into a workplace pension from an early age.”
But behind this relatively rosy forecast lies a number of assumptions about how auto-enrolment will work in coming years. Resolution assumed that the majority of people will stay in the scheme, despite the big increase in contributions that will be required from April next year, when they increase from 1% to 3% of salary, then 5% the year after.
“The temptation to opt-out of pension saving will grow as the take-home pay of a typical employee is set to rise by £1,700 over the next four years if they were they to stop contributing; twice as much as the £850 they would receive if they made the minimum contributions,” the report found.
It also assumed that the money saved into auto-enrolment pensions will grow at a rate of 5.6% a year, which is below the growth rate assumed by the Department for Work and Pensions but higher than some investment experts think is likely in an era of ultra-low interest rates.
The report’s authors also warn about the hit that today’s young adults could take from the recent official downgrade in the long-term prospects for growth and productivity in the UK economy.
But the report argues that the number of people retiring on two-thirds of their final salary, seen as the gold standard for pension planning, has never been that high.
It said that the average “replacement income” for people retiring today is about 54% of their former income and that this will stay broadly at that level for future generations.
“Our analysis of current and future retirement income adequacy shows that neither pessimism nor complacency is warranted,” the report concluded.