Twenty-six-year-olds don’t tend to worry about their pensions – at least my friends don’t! With so many financial pressures on young people, this is hardly surprising. However, recently, I’ve become increasingly concerned about my pension. I’m concerned that Covid-19 has ruined my chances of a comfortable retirement. Read on to find out why.
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How Covid-19 has affected my retirement prospects
I’ll admit it sounds crazy to be worried about my retirement prospects at 26. But compound interest works wonders and it’s so easy to fall behind with pensions.
I was put on furlough for around five months in April 2020. Then I was on flexi-furlough for another four months, meaning I was still earning less than my pre-Covid-19 salary.
Throughout this time, due to my paycheck being lower, my pension contributions – and therefore my employer contributions and my government tax relief – lowered too.
Over nine months this can make a significant difference. In total, I missed out on investing over £800 in my pension pot. This might not seem like a lot, but with compound interest (assuming 7.5% growth annually), it could have grown to £14,772 by the time I reached 65.
That’s a significant sum of money that would make a difference to my retirement.
Aside from these lost contributions, when I came back to work, I was nearly a year behind. All the work I would have done and the progress I would have made didn’t happen. Therefore, it took longer to be ready for a pay rise or another role.
This, in turn, means I haven’t been able to increase my pension contributions above their February 2020 level.
It’s harder to put a figure on this, especially as the full effect is not yet realised. If I’m a year behind now, it’s possible I could stay a year behind for the rest of my career. The effect on my pension and subsequent retirement could be long-running.
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What the figures say
According to the OECD’s Pensions at a Glance, someone currently on the average wage in the UK can expect the average income from their State Pension and auto-enrolled pension to cover around 58% of their working wage when they come to retire.
As a result, at the moment, just under 24% of people aged between 65-69 continue to work in the UK.
This is a significant number. It’s a figure that will probably only keep rising as the financial impacts of Covid-19 are felt by younger generations.
Meanwhile, the ratio of working age people to non-working age people continues to accelerate, and this will place further pressure on the State Pension.
The OECD predicts that a 22-year-old entering the UK labour market now will be able to retire at 67. This is dependent on them working continually until they reach retirement age. Therefore, women may struggle to retire at this age if they have career breaks or extended maternity leave.
The expert’s view
The financial impact of Covid-19 on young people has been well reported. More young people were put on furlough or made redundant during the height of the pandemic.
Such events clearly have an immediate financial effect. They also have longer-term implications.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, explains, “Late career starts, lower wages and redundancy means they risk missing out on vital pension contributions. For a generation who has already suffered so much financially at the hands of the pandemic, this is another blow.”
Young people face working far longer than traditional views on retirement would indicate.
Morrissey warns, “While many people are happy to do so, there will be others who are unable to – Public Health England data shows healthy life expectancy is much lower than life expectancy and so the reality for many people is they will be unable to keep working for as long as they need.
“The role of the workplace pension has never been so important in plugging these gaps. Auto-enrolment will make a big difference to people’s retirement prospects in years to come, but it’s important to engage and not just set and forget your contributions.”
Morrissey also urges people to top up their contributions whenever they get a pay rise. This can make a huge difference to your pension when it comes to taking it.
She explains, “If you are increasing your contribution, it’s also worth checking with your employer if they will increase their own contribution – over time this can really add up.”
