The FCA’s Intergenerational Differences paper highlights the difficulties that people in their late 30s to early 50s face in saving for retirement. How can the industry improve their prospects?
Grouping people according to age, gender, marital status and how wealthy they are is something product providers and advice firms do to tailor their services to meet different needs.
Earlier this month, the FCA saw merit in segmentation when it published its Intergenerational Differences paper, opening the debate on how to meet the changing needs of three different generations: baby boomers, Generation X and millennials.
Generation X, defined as those born between 1966 and 1980, “are likely to be financially stretched” between helping the generations above and below them.
Having largely missed out on final salary schemes, they find it difficult to save money for their retirement. So, what can be done to help?
A lost generation
Commentators agree with the FCA’s picture of why Generation X are struggling to fund their retirement. For some, it resonates on a personal level.
“I’m smack in the middle of finding a nursing home for my mother-in-law, who is 76; I have one kid at uni with another two years away and my parents, who are in their early 80s, need some level of monitoring,” says Aon area director Martin Parish.
As well as financial pressures, Generation X face time pressures. “That has a bearing on our time to commit to things such as planning for retirement. If you come back from taking your parents to a hospital appointment, the last thing you want to do is log in and model your financial future,” says Parish.
“I think people are far more inclined to sit on the terrace having a chilled wine as opposed to number crunching.”
PA Consulting pensions expert Mike Teall thinks pension savings are relatively predictable compared with the lack of clarity over how much Generation X will need to pay for their parents’ care, how much they will inherit, and when their children will become financially self-sufficient.
“There is a gap in the market for financial products that insure against this uncertainty. Government incentives may be required to establish markets for these products to avoid anti-selection issues that will drive prohibitive premiums,” he says.
Atrium Financial managing director Noor Uddin has recently seen clients in their 40s and 50s looking to start a pension.
“They know they are starting late for it to be sufficient to provide an income in retirement. I asked them why so late and most replied that they had not had that sort of information,” he says.
He says Generation X got lost somewhere in the gap left by the decline in final salary schemes.
“They didn’t know what to do, they didn’t have the information, so they prioritised their children and the older generation.
“They are too generous, too caring and they have forgotten about themselves.”
Advice firm Salisbury House has conducted research that shows Generation X have fallen so far behind on their pension savings that they are now being forced to make bigger contributions in an attempt to play catch-up.
“They are looking at pensions now as they have realised it’s serious but they haven’t got enough time to do it,” says the firm’s managing director Tim Holmes.
He adds that many people have not had the right advice and think a small amount in a pension will miraculously turn into a large amount at retirement.
From a practical viewpoint, Generation X need to understand what they already have before they can work out whether there is a shortfall that needs to be covered in their retirement savings.
Aegon pensions director Steven Cameron says: “Generation X need to take stock of what they have currently got as they still have at least 10, maybe 25 years, to go before retirement – which is still a good amount of time to get back on track if they can.”
Cameron adds that they need to look at everything from their state pension forecasts to any benefits from final salary schemes that they had.
Given that many people in this age group will have had more than one employer and consequently may have a number of workplace pensions, Cameron thinks the pension dashboard will help to locate any that they may have lost track of.
“It will also save them time and money if they are seeing an adviser as the adviser wouldn’t need to spend time finding them,” he says.
Managing director, Portafina
Generation X are not only worried about the consequences of not having enough money to sustain their current lifestyle in retirement, but also how their retirement income will cover their bills.
You could apply the same principle as auto-enrolment to pay rises by automatically diverting a proportion of any rise into their pension. It could make a huge difference to retirement without people feeling a hit on their daily lives.
Anthony Morrow, founder of online advice service OpenMoney, questions the wisdom of advising Generation X to put money in an Isa or pension if they are in debt and have no cash savings. Also co-founder of evestor, Morrow says: “We’ve given recommendations to over 20,000 people and for three-quarters of those the recommendation was not to invest.”
Morrow believes the retirement saving struggle of Generation X is “probably not something the industry can sort themselves as it’s ingrained in life in the UK”.
He says: “People have job insecurities, rising costs, rising bills – all the things we may think are not as important as putting money away for a pension in 25 years’ time.
“Don’t guilt-shame them for not putting enough in their pension.”
Ascot Lloyd IFA Helen Richardson thinks Generation X should aim to keep their debt as low as they can throughout their lives.
“People need to recognise the need to live within their means now so that they can afford to put money away into a pension before retirement,” she says.
Richardson adds that people need to adjust their lifestyles in advance to cater for their retirement.
“If this means making cutbacks now, so be it.
“Making small changes can make a big impact on our financial health in the long run.”
Shaping the future
There is no point dwelling on the contributions that should have been made earlier; it is what Generation X do from now on that will make a difference.
“Time is not on their side but what’s done is done and we can shape the future as best we can,” says Uddin. “It’s about damage limitation – putting in as much as you can afford is the key.
“As an adviser, it’s important to have an ongoing service with them, so if the initial plans are not on track you can look at what can be done to limit the shortfall.”
Intelligent Pensions technical director Fiona Tait sees some silver linings for Generation X.
“Their earnings are likely to be approaching their peak and although many people are having families and getting on to the housing ladder at older ages, there is actually an end in sight,” she says.
Tait points out that when these expenses fall away they will be left with a sizeable financial asset in the form of their family home.
She adds that this generation are also expected to inherit some wealth from their baby boomer parents, albeit later in life.
However, Royal London director of policy Steve Webb thinks the government needs to use additional nudges to get pension saving up to more realistic levels.
“For this group, things like ‘automatic escalation’, where contribution rises are prompted by pay rises, is likely to be the least painful way of prompting increased savings,” he says.
Chartered financial planner, Equilibrium Asset Management
Knowledge of a problem is one thing, acting on that knowledge is another. Getting to know my clients, their values, their motivations, is an important step in overcoming inertia and guiding them through the decision-making process.
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Ultimately, a good financial planner should be helping clients feel financially well, not flogging them a pension or critical illness cover.