Savvy millennial savers – what they need to know about pensions

Stagnating salaries, rising house prices and student debt are all part and parcel of the financial challenges facing millennials today. Add to this the fact that this generation will go on to live to 100 and will change jobs frequently and you have a very complex financial future.

Making smart and informed decisions will need to come earlier than their parents, with much less help from their employers who won’t be taking the same responsibility as was the case for their parents. Getting started is essential.

An unrealistic savings culture

The media often broadcast high, unachievable amounts that young people should be aspiring to save. These target savings are based on achieving the same retirement income their parents aspired to (but rarely achieved). Telling people they need to save more than they can possibly afford is counter-productive and scares young people away from even beginning to engage with their pension saving. A report from International Longevity Centre UK argued that millennials would need to save as much as 18% of their earnings into a pension if they wanted to enjoy a comfortable retirement. Unsurprisingly, this number is scary for most who currently struggle to save even a fraction of that. After all many of them are already paying an effective graduate tax of 9% on earnings above £21,000.

In our view, millennials should look to save little and often – without worrying too much about putting large amounts aside from the start. They can then increase their contribution whenever they get a pay rise, ensuring they don’t stagnate. More is always better when it comes to saving for retirement.

Employers now have to help by auto-enrolling them into a pension saving scheme. Many of them make matching contributions beyond what the law requires. Taking advantage of that can make a significant difference to how much is going into pension savings.

Make it more manageable

Currently, 4 in 10 millennials have no pension provision, and 3 in 10 say that they simply don’t understand enough about them. Even millennials who do have a pension aren’t always clear about what it entails – with 14% who do have one not knowing what type it is.

A knowledge gap evidently exists when it comes to understanding how much to save for retirement and what pension benefits are available from an employer.

Steps that millennials can take to make their pension more manageable:

Find out how much your employer contributes and what the contribution structure is so that can make the most of that provision.
Understand how your money is invested and choose the option that suits you best. Nowadays, more help is available to help you make the most of the options that are there.
Analyse your own affordability – after your student loan repayments for example, taking into account your current circumstances, priorities and aspirations.
Assess all the alternative savings vehicles available to you.
Review progress on a regular basis, so you can change your approach and contributions if needs be. Good pension providers will have tools to remind you to review at certain important milestones, for example birthdays.

What does this mean for employers?

Using digital tools and metrics are going to be crucial when it comes to better engaging millennials. It will be important to help younger members of the workforce engage with their pension in a way that suits their lifestyle – connected, fast paced and busy. Digital tools can help younger employees understand and manage their contributions and investments. Employers who approach millennials in the right way will engage them with pension savings and this critical element of the reward package.

The pensions industry and the way we save are changing, new approaches are needed to ensure the next generation gets on the right journey to a financially secure future.