When can millennials expect to retire?

The cost of living makes it more difficult for younger generations to accumulate the resources required for later life, but a consistent approach harnessing the benefits of pensions can greatly assist.

| 8 min read

The financial challenges facing younger generations are considerable, and they have only increased as the cost of living has ramped up over the past couple of years. According to a report from Deloitte, 54% of UK millennials say they live payday to payday. With the competing priorities of buying a home, starting a family and taking time out to enjoy life, there is often little capacity for saving towards retirement.

Meanwhile, a valuable component of retirement income, the State Pension, looks set to kick in later in the future than it does today. A recent review of the State Pension by the Department for Work and Pensions concluded its costs could rise to unsustainable levels, which could force the government to hike the age for eligibility or cut the level it pays out.

In this difficult context how is it possible for millennials to plan for retirement and accumulate the resources required for a decent standard of living in later life?

Difficult but not impossible

The first step in retirement planning is determining how much those later years are likely to cost, in order to calculate the money needed in total. The Pensions and Lifetime Savings Association suggests that a single householder will need a retirement income of about £43,100 a year for a ‘comfortable’ retirement – assuming they live mortgage and rent-free. Couples need more, but not generally twice as much as they share lots of expenses between them.

Research we conducted* found that on average consumers expect to be working just over 23 years* over the course of their working life. This is striking because it only builds around two-thirds of the full entitlement to the State Pension, and running this scenario through to conclusion suggests a high level of saving in a well-paid role would be necessary to accumulate enough for a comfortable retirement in this time-frame.

  • 18% of 25-to-35 year olds have never checked their pension pots
  • 86% of consumers are or expect to be fully or partly reliant on the state pension.
  • 35 National Insurance record required to allow for a full state pension allowance

Yet all is not lost. A consistent approach to harnessing the benefits of pensions, in the form of tax relief and employer contributions in workplace schemes can work wonders. Employers must pay in at least 3% of your salary to your pension, but some may offer more.

The higher the employer contribution, the less you need to save yourself. Meanwhile, tax relief reduced the effective cost of your own payments with a £100 pension contribution typically costing £80 for a basic rate taxpayer and £60 for a higher rate taxpayer. This approach, combined with starting as early as possible to benefit from the compounding of returns as far as possible, offers a realistic route to meeting retirement goals.

But how should you establish how much you realistically need to accumulate and check if you are putting aside enough? Engagement with pensions is a perennial issue, but using an interactive online pension calculator can help bring some important considerations to life.

A calculator aims to provide an indication of the monthly saving needed to fund a level of income at your selected age, taking into account your existing funds. It does have to make a number of assumptions, so it’s only a broad indication of what to expect, but it can offer real insight into what different levels of saving can achieve.

Use our pension calculator

Are you entitled to the State Pension?

The State Pension is an important element to consider as part of your planning. The present level of a full New State Pension is just over £11,500 a year, which is enough to pay for the basics or, to put it another way, about a quarter to a third of a ‘comfortable’ retirement income.

We can expect the State Pension amount to broadly increase with inflation over time, albeit the age at which you can start to collect it will likely continue to rise. It may well be closer to 70 by the time millennials are in their 60s given the UK’s progressively aging population and doubts over its sustainability at current levels.

The research we conducted recently* also revealed widespread misconceptions regarding the State Pension. On average, millennials think they only need to pay 22 years* of National Insurance contributions in order to qualify for a full state pension. In fact, you will need 35 qualifying years, and you will usually need at least 10 qualifying years on your National Insurance record to get any amount.

This is particularly worrying as not only is it uncertain when the State Pension will kick in, but our research reveals that 86%* of consumers are or expect to be fully or partly reliant on the state pension. Fortunately, it’s easy to monitor your entitlement to the state pension through your national insurance record and by getting a State Pension forecast.

It’s also possible to buy missing qualifying years to add to your State Pension. This could be worth doing if there are gaps in your national insurance record and it’s not possible for you to get to 35 working years needed for the full entitlement.

Of particular interest to millennials is the ability to top up national insurance contributions to meet the minimum earnings threshold for previous years where they may have been a lower earner, worked part time or had a portion of a year off work. In some circumstance people are able to add a qualifying year to their record with a payment of less than £100. It is worth noting there are transitional arrangements in place currently whereby you can pay to fill gaps in your record dating back to 2006 if eligible, but this ends on 5th April 2025, after which you can only go back six tax years. There’s more information on the government website here.

How should millennials save for retirement?

  1. Retirement may feel like a long way off but getting into the retirement saving habit early on in life, even with small amounts, can give you a huge advantage. Time coupled with the right investment strategy can do a lot of heavy lifting for you.
  2. Aim for a clear and achievable target that will put you on the right track. For example, 12% to 15% of gross salary tends to provide a decent level of income if you are consistent over a 30 or 40 year career.
  3. Your savings target might seem high, but don't underestimate the power of employer contributions and tax relief. The higher the employer contribution, the less you need to save yourself.
  4. Budgeting strategies can help you meet your retirement saving goals. One of the simplest is the 50/30/20 rule that breaks your expenditure into needs, wants and savings – see more in Erica’s video.
  5. Understand how the State Pension works and how to find out your entitlement. Consider making payments to plug gaps in your national insurance record where affordable and worthwhile.
  6. Keep track of all your pensions throughout your career so you can monitor the underlying investments and keep yourself up to date in terms of where you stand.
  7. Always beware of investment scams, pensions can be a particular target of fraudsters operating from unregulated firms.
  8. Get help with our Retirement Planning services. Whether retirement feels like a long way off or just a few years away, we’re here to help you create a financial plan.

View our Retirement Planning services

*Source: Charles Stanley Money Milestones survey conducted by Censuswide March 2023

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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