A major study by the economic think-tank, the Centre for Economic and Business Research has discovered that adults under the age of 44 are not saving enough in the short or long term, and as a result, could face a pensions shortfall of more than half a million pounds.
The study went on to call on ‘baby boomers’ to rethink how they pass their wealth on to their children and grandchildren in a move to solve the funding problems that younger generations are likely to experience in the future.
Future Retirement Shortfall
In the current climate, 18-44-year-olds think that an annual income of £30,000 at today’s prices is sufficient to pay for a comfortable retirement.
However, in order to buy an annuity for that kind of annual income, a personal pension pot of £725,000 would be required. And as life expectancy for both men and women increases, the cost of such an annuity will only increase.
The current average savings pot is £175,000, leaving a shortfall of £550,000. In order to achieve a big enough savings pot, an 18-year-old worker would have to save approximately £440 per month, whilst a 44-year-old would need to stash away £1,840 every month.
Savings accounts are perceived as not affordable by most
In addition to a shortfall in pension pots, UK households only save an average of 6p per pound, compared with 15p per pound saved in 1992.
Even those households with an annual income of £100,000 to £150,000 admit to saving virtually nothing.
Pensioners to the rescue?
Pensioners’ incomes are now rising faster than the average working man’s annual wage.
This is largely due to generous final salary pay-outs, the triple lock on stage pensions, and property ownership worth around £1.3 trillion.
So, are the older generation ready and willing to bail-out their offspring? The answer would appear to be, ‘not at the moment, thanks.’
The Centre for Economic and Business Research study found that around 80% of over-55s expect to leave their assets to their children through their will.
However, gifting money today is expected to be worth three times its current value to grandchildren, thanks to the effect of compound interest and investment returns.
Despite the fact that significant savings could be made in inheritance tax by gifting now, a mere 2% of over 65s would consider it.
The UK Government are reportedly considering a range of incentives to encourage pensioners to relinquish their grip on the ‘silver pound’.
A ‘saving for grandchildren’ tax incentive scheme is proposed that would see a gift of 10% from a grandparent’s estate reduce their inheritance tax rate from 40% to 36%.
It is also recommended that gifts should immediately be removed from grandparent’s estates for IHT purposes, effectively scrapping the current seven-year rule.
Baby boomers encouraged to bail-out their kids
So, the harsh reality of the report appears to be this.
The ageing and outgoing baby boomers will be the last generation to enjoy a comfortable retirement, unless they take action now to bail out their kids.
Rather than enjoying new cars, meals out, or holiday homes in the sun, ageing parents are being encouraged to rethink when and how they are going to pass on their wealth to their cash-strapped children, whilst enjoying a more frugal retirement.
Earlier and more regular gifting could help to set grandchildren up for life, as well as reducing inheritance tax bills for first-in-line beneficiaries.