Helping Gen X clients boost 'bleak' pension prospects

28 Jan 2021

Catching up on some reading over the break, I spotted the new International Longevity Centre's (ILC) study entitled Forgotten Generation? Retirement Income Prospects of Generation X.

The ILC's summary of findings chimes closely with Dunstan Thomas' own consumer study of Generation Xers' retirement prospects which we published back in June 2020 which was referenced in the ILC report.
The ILC found: "Many Gen Xers await a bleak financial future. At least one in three - or 4.3 million - are at risk of retirement with incomes that would result in minimum standards of living due to inadequate pension contributions, and no defined benefit (DB) pension savings to support them."

Download the Generation X Consumer Study below

Its findings broadly were:

• Many Gen Xers can expect low incomes in retirement.
• Many Gen Xers find it hard to prepare for retirement due to a lack of financial stability and other pressing priorities.
• Covid-19 is only going to make things harder - the economic fallout will set back many Gen Xers, but it could also increase engagement in retirement planning.

The Dunstan Thomas study also found that Gen Xers saving levels were negatively impacted by the timing of the Great Recession from 2008 to 2013 because of their age at the time (they were 28 to 43 when it started). Our study found that 9% of Gen Xers saw ‘a major impact with retirement savings going on hold for all or nearly all' of the infamous five-year downturn.

One in seven (14%) self-employed Gen Xers froze all retirement savings during most or all of that period. Some 15% of Gen Xers with a monthly household income of £4,501-£5,000 today, recorded halting pension contributions for most or all of this period. Will the Covid-19-caused downturn drive similar levels of under-saving amongst Gen Xers?

It seems that Gen X, now aged 40-55, have stumbled from the banking-based Great Recession to a pandemic-led recession at the time when they ought to be nearing the peak of their earnings potential. The period has disrupted many of their earnings and savings goals. Many have faced stagnant or fluctuating incomes through these tough times.

Scanning across to the other big news of late last year - that of Arcadia going under with the potential loss of up to 13,000 jobs. Its occupational DB pension scheme will now be administered by the Pension Protection Fund (PPF), although only a minority of Arcadia's shopworkers are in the failed retailer's DB pension scheme anyway. Dunstan Thomas' Gen X study found just over a quarter of them (27%) had access to a DB pension - with that percentage declining further still in those under 45.

All defined contribution (DC) scheme holders losing their jobs will see employer contributions cease and, in all likelihood, most will stop contributions altogether while they look for a new job.

My counsel to Generation Xers is to focus their attention on the top three factors that will determine the outcome of retirement savings:

1. Initial Focus - Contributions

Those that don't make sizeable contributions to a pension are only fooling themselves, and sadly many of Generation X fall into this camp. Fortunately, workplace pensions are now universal, and the place for those regular monthly contributions is here.

But what about ad-hoc top-up contributions? I am a contrarian at heart and suggest making your largest pension contributions as one-offs when others are struggling to put in, i.e., right now! In this way, you stand to benefit from lower asset prices. Your savings will be boosted on rising markets as prices begin to anticipate economic recovery.

You will also be assured of the best rates of tax relief on your contributions as the Chancellor will not yet have begun attempting to rebalance the books in earnest. Such a time for bulk pension contributing is therefore right now!

2. Mid-stage focus - Investments

The priority for older Generation Xers, perhaps those age 50 or more, is likely to be more focused on wise investing for growth. Unleash the power of tax-free compounding growth on the contributions already made.

Beware, the investment landscape is changing quite rapidly as we embrace the green agenda in our quest to move towards ‘net zero' carbon emissions. There are some phoney ‘greenwashed' investments to be avoided.

Notwithstanding the dangers, jump aboard the bandwagon of climate-friendly shares as pretty soon nobody will want to buy anything that looks dirty, smoky, or coal-fired and prices there will plummet.

3. At-retirement focus - Making the right decumulation choices

Making the right choice at retirement is tricky today. When exactly is that retirement going to come for your clients? As our Gen X study found, many are looking to put it off until much later in life than originally planned. The key then is retaining flexibility in your clients' 60s and even 70s. So, IFAs need to be reaching out to their clients, not just at-retirement but deep into retirement, to make sure changing retirement income needs are being met.

The good news is that new technology and new innovative solutions are now coming onto the market. So, look out for these as you owe your growing base of older clients a great deal more than the same old binary choice of annuity or drawdown. After all, the best things in life like tea and wine, often come from the blending several fine varieties together. Be a master-blender for your at-retirement clients!

Now more than ever before, taking regular financial advice throughout retirement will pay healthy dividends to clients. It's no wonder I meet an increasing number of IFAs who have chosen to specialise in this part of the market.

Finally, the current focus on value for money is turning everyone's heads towards buying pension schemes and assets based on annual management and other charging levels. The reality is that if you get the contribution levels and investment selections right, the charges involved will pale into insignificance.

Be cognisant of them but don't get distracted too much in pursuit of value for money. Those that focus the most on charges often understand pensions the least. The key today is to have enough invested for long enough to build a big enough pot to not have to face uncomfortable falls in income through lengthening retirements.

by Adrian Boulding, Director of Retirement Strategy at Dunstan Thomas
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Follow Adrian Boulding on Twitter: @adrianboulding or read Adrian's previous article here.