Why retirement won’t look the same for younger Brits

This story was featured in the Financial Times

As the economic and societal landscape continues to evolve, the question of whether pensions will still be fit for purpose and a reliable source of income for today’s Millennials and Gen Z is more pertinent than ever.   

Based on the Retirement Living Standards calculation by the Pensions and Lifetime Savings Association, the estimated cost of retirement continues to rise each year. This means that the amount today’s young people will need is likely to be significantly higher than the current figures: £14,000 (minimum), £31,300 (moderate), and £43,100 (comfortable). 

The challenge is that as life expectancy increases, household bills and the cost of living will continue to rise at a rapid pace – meaning the pension pot is going to need to work harder than ever to ensure the nation’s future retirees don’t outlive their retirement savings.

It’s likely that the state pension won’t exist in its current form – it may be reduced, means-tested, or phased out entirely. And even if it does remain, it almost certainly won’t have kept pace with inflation.

Today’s younger generations are also more likely to be renters rather than homeowners, which will be a particularly challenging situation given rents tend to rise faster than inflation – and it is virtually impossible that the state pension will be sufficient to cover the cost 20 years from now. Traditionally, financial modelling for retirement assumes that you won’t have housing costs, as most people would have paid off their mortgage by that point.

For those who do make it onto the property ladder, it’s likely they’ll still be carrying a mortgage into retirement. This adds an extra financial burden that needs careful planning, as mortgage debt in later life can have a significant impact on financial stability.

Carina Chambers, our Pensions Technical Expert at digital wealth manager, says: “For Millennials and Gen Z’s lucky enough to own their own homes by retirement age, I think we will see rooms being rented out to lodgers becoming far more the norm in a bid to help pay the bills. I also think they will give more serious consideration to downsizing to a less expensive area than probably today’s Baby Boomers have done.”  

The shape of work for Gen Z is also likely to be more fluid and dynamic. Recognising that full retirement may never be an option, more people are embracing ‘micro-dosing retirement’—taking periodic career breaks to focus on personal interests, travel, or mental well-being, rather than waiting until the traditional retirement age.

While this might be beneficial in enhancing wellbeing and life satisfaction, it could be damaging financially if, during these sabbaticals, pension contributions are paused or never resumed, leaving a significant hole in the pension pot through the loss of employer-matched contributions and the missed opportunity for compound growth over time.  

Adding to this, a growing number of people are staying single or reaching a stage in life where divorce is more common, so they are exposed to the ‘singles tax’—the financial strain of managing living expenses on a single income compared to dual-income households.

Carina concludes: “Millennials will get to retirement with a very different cost structure to today’s retirees, and this is an issue young people, policy makers and pension advisors alike would be wise to examine.

“The fact is, the size of the pension pot needed during retirement for today’s 18 to 45 year olds will be considerably larger than in previous generations due to increased life expectancy, rising living costs and the different shape of lifestyle they aspire to lead. This means that today’s younger generations must be more proactive and strategic in addressing the unique challenges they face. By doing so, they can ensure a more secure and comfortable retirement, despite the evolving financial landscape.

“Investing in a workplace or private pension is therefore still critical, and ignoring or not contributing to one would be a massive mistake. 

“Pensions will still be fit for purpose but the goal posts will have changed. Young people will need to plan with far more precision and be prepared to contribute far more heavily than any previous generation, because it is going to fall much more on the individual to financially support themselves than ever before.”