We all hope to achieve financial security in retirement, allowing us to focus on the things we enjoy. While retirement might be associated with indulging hobbies and aspirations, Generation X (born between the mid-1960s and early 1980s) need to plan ahead if they’re to enjoy the same level of security as their parents.
For Generation X, retirement is drawing nearer, but there is still time to review plans and take steps that could lead to a more comfortable retirement. If you’re part of Generation X, here are five reasons it’s more important than ever to engage with your pension
1. Defined benefit pensions are far less common
Defined benefit (DB) pensions, also known as “final salary” pensions, provide a guaranteed income throughout retirement. While some employers still offer DB pensions, unless you work in the public sector, you’re far more likely to have a defined contribution (DC) pension if you’re part of Generation X.
DC pensions are where you make contributions to build up a lump sum for retirement. You can then access your pension in a variety of ways to create an income. This provides you with more flexibility, but DC pensions are usually much less generous than DB pensions. The switch to more DC pensions means the next generation of retirees won’t have the same level of financial security and will need to keep track of what their contributions mean for their future lifestyle.
2. Auto-enrolment started midway through your working life
Auto-enrolment aims to close the pension gap and ensure everyone is saving for their retirement. From 2018, most employees are automatically enrolled into a workplace pension, with their employer making contributions too. For younger generations, it means they’ll have an opportunity to save from retirement right from the start of their working life.
However, for Generation X, auto-enrolment has come midway through their working life and you could have missed out on vital contributions. It means you may have to contribute higher sums as you near retirement to achieve the level of income you want.
3. Your State Pension Age will be later
The State Pension Age is rising and will reach 67 by 2028. It’s being kept under review and is likely to rise further. Generation X is likely to be nearing 70 by the time they can claim the State Pension. If you hope to give up work or cut back sooner, you need to have your personal finances in order to fund this.
It’s important to know what you want your retirement to look like and when you’d like it to start. So, take the steps now to ensure you can retire when you’re ready, including before you reach State Pension Age.
4. You will spend longer in retirement
One of the reasons the State Pension Age is rising is that life expectancy has increased. You’re likely to spend longer in retirement than previous generations. While improved health is a good thing, your retirement savings will need to stretch further. You need to consider how your pension and other assets will create an income if you spend 30 or 40 years in retirement.
According to the Office for National Statistics, a 50-year-old man’s life expectancy is 84 years. But they also have a one in four chance of reaching 93. For a 50-year-old woman, life expectancy is 87, with a one in four chance of reaching 95. Even if you don’t retire until you reach State Pension Age, you need to consider how to make your assets last decades.
5. Life milestones may have affected retirement savings
Compared to older generations, you may have ticked off milestones later, such as buying your first home or having children. It can mean you near retirement with more financial commitments, like paying a mortgage, than your parents did. You may also be supporting elderly relatives, children or grandchildren in some way. As a result, paying into your pension may not be a priority.
Understanding how your circumstances now can affect retirement is important. There are often things you can do to make sure long-term plans stay on track, but a proactive approach is important.
Planning for retirement now
Retirement may still seem like it’s some way off, but it’s never too soon to put a plan in place. From how you want to spend your time in retirement to how much you need to save, these steps can give you confidence about the future. Generation X faces some retirement challenges, but by engaging with pensions now, you’ll be in a better position to meet your goals.
If you’d like to talk about your retirement plans, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Richard Fyfe is a Chartered Financial Planner and a Director of Fyfe Financial.