According to a new report from the International Longevity Centre UK, young people in the UK will need to save 18% of their salary if they are to have an 'adequate' retirement. The new report by the think tank has deemed the UK pension system as "sustainable but inadequate", with young people today facing a savings challenge that is monumental to ensure a decent retirement income.
The report, entitled 'The Global Savings Gap' says that the UK pension system is "middle ranking on adequacy and intergenerational fairness" when compared to other high-income economies. However, a number of factors mean that those entering the workforce these days will face a hostile and difficult environment in which to invest their pension pots. These include:
- Low-interest rates
- Low investment returns
- Sluggish wage and economic growth
- The gradual decline of defined benefit schemes
Hochlaf, Assistant Economist, ILC-UK said:
"The combination of persistently low returns, sluggish wage growth and a changing labour market means today's young people will need to save more to enjoy their retirement. The government must do more to extend pension coverage and ensure that contributions towards private schemes are sufficient, especially amongst overlooked groups such as the self-employed and those on low incomes who have yet to benefit from initiatives designed to improve private savings."
The report goes on to note several key policy changes that the UK pension system must address:
- Auto enrolment: Although this has proven very effective at getting people saving for retirement, people are still not saving enough. The report suggests that the government must consider a 'nudge' approach to support higher contributions, with auto escalation being one particular policy option.
- Self-employed: The report suggests that the self-employed and people in other non-traditional employment types should be given access to auto enrolment. This is especially crucial as the number of self-employed people in the UK has increased from under 3 million in 1984 and 4.5 million in 2015.
- Financial education and capability: This is already an issue in the United Kingdom and will become even more so with the UK now putting a greater burden on the individual to save for their retirement.
'The Global Savings Gap' is available to download at www.ilcuk.org.uk.