We hope you feel confident in your financial security, including the provisions you’ve made for retirement. But have you ever spoken to your children or grandchildren about their pension or retirement plans? Research suggests their expectations could be far higher than the reality.

According to a report from Scottish Widows, the average worker in their 20s faces an annual shortfall in retirement income amounting to £6,500. It’s a sum that could have a significant impact on financial security or affect retirement plans. The gap will be even wider for those that are ‘disengaged’; described as individuals that do not know how much they are saving in their pension. Those that aren’t keeping track of their pension could find the shortfall amounts to £12,000 a year, almost half of the figure they predict they’ll need to live comfortably.

The shortfall is a particular concern as homeownership declines whilst the age of the average first-time buyer rises. It could mean those retiring in 40- or 50-years’ time will need to cover thousands of pounds of additional rental costs. As a result, it’s perhaps unsurprising that a fifth of twenty-somethings currently earning between £10,000 and £20,000 think they will never be in a position to retire.

Auto-enrolment: Are workers saving enough?

The majority of workers will now be automatically enrolled in a pension scheme by their employer. It’s a move that aimed to encourage more individuals to save for their future.

A snapshot of the figures suggests it’s worked. Millions more are now saving for their retirement through a Workplace Pension, meaning they also benefit from employer contributions and tax relief, as well as potential investment returns. However, the minimum contribution figures are below the recommended amount for those hoping to save enough for a comfortable retirement.

Auto-enrolled employees that don’t increase their contributions will be putting away 5% of their qualifying earnings, with employers contributing an additional 3%. This falls far below the rate that is often deemed ‘adequate’ when saving for retirement. Scottish Widows has recommended that auto-enrolment minimum contribution levels increase to 15% by 2030, split between employers and employees, to combat the shortfall.

Pete Glancy, Head of Policy at Scottish Widows, said: “Automatic enrolment is improving the retirement prospects for many, but those who fail to save beyond the default requirements of the scheme will be faced with a significant income gap.”

With the shortfall many of the younger generation are facing in their retirement years, discussing pensions with children and grandchildren can help to ensure their financial future.

4 reasons to engage younger family members in pensions

1. Secure their financial future

When thinking about financial priorities, retirement probably doesn’t come out top for young adults. Saving for a property deposit, paying off a mortgage or supporting a family are probably larger concerns. Whilst focusing on the short and medium-term is common, it’s important that the long term isn’t neglected too.

Juggling different goals with various timeframes can be challenging and it may mean some of the younger generation is tempted to stop pension contribution. However, doing so could place their financial security at risk. Encouraging them to think about the income they need in retirement now can help.

2. Get the most out of pension benefits

A pension is typically the most efficient way to save for retirement. The sooner individuals start contributing, the better. Adding even small amounts over a long period can lead to a pension that’s larger than expected, particularly when you add the benefits of tax relief and employer contributions.

On top of this, pensions are usually invested. As investment returns remain in the pension, they go on to generate returns of their own. This is known as compounding and means a sum of money grows at a faster pace. Over the long term, it can really help to boost pension savings.

3. Offer your perspective

Simply asking about what a loved one thinks they’ll need in retirement and the steps they’re taking to achieve this can highlight the gap between expectations and reality. You may find you’re in a position to offer a perspective on this from your own experiences. Perhaps they’re estimating they need more than necessary in retirement or forgetting how other assets may be able to support them, for example.

Discussing your own provisions may be the trigger younger generations need to seek out more information about their pension and the retirement it will afford them.

4. Discuss other financial priorities

Whilst pensions are an important part of planning for retirement, they’re not the only thing to consider. Talking openly about pensions with children or grandchildren can open the door to discussing other financial matters. It’s a step that can set them on the path to financial security now and in the future. Whether you want to encourage loved ones to consider building up an investment portfolio or talk about their inheritance, an open approach to money can be useful.

If you have any questions about your finances or how you could support younger generations, please contact us.

Please note: Workplace Pensions are regulated by The Pensions Regulator. A pension is a long-term investment not normally accessible until age 55. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  Tax reliefs will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

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