Home Business News What will be the long-term impact of Covid-19 on pension savings for millennials?

What will be the long-term impact of Covid-19 on pension savings for millennials?

15th May 20 5:23 am

With potentially many job losses on the horizon when the Coronavirus Job Retention Scheme comes to an end and the likelihood of continuing stock market volatility following the coronavirus crisis, what will be the effect on the retirement savings for millennials?

Younger workers are among the most vulnerable to job losses or a reduction in working hours as a result of the financial strain following the Covid-19 outbreak. The Chancellor has announced that furloughed staff can return to work part-time from August and will have their wages “topped up” by the government but what impact can this have on the long-term saving plans of millennials?

If a pay cut or working part-time is the solution to getting back to work from a previously full-time position, then relatively the pension contribution drops in pounds and pence in proportion to the reduction in salary. For example, for someone returning to work on a three day a week basis rather than five, their pension contributions will be 40% lower than before the Covid-19 crisis.

There may potentially emerge a trend that people whose general earnings and affordability is affected in such a way will cease pension contributions altogether, or reduce to minimum levels, which will also have a negative impact on long-term saving.

This is especially the case when you consider that in fact it’s this time in a pension fund’s lifespan that can have the most positive impact over the long-term. Retirement savings during the early years are more exposed to the stock market, in a workplace pension scheme. Most default investment strategies encourage taking on greater investment risk, such as having larger exposure to stocks and shares, the further away you are from retirement.

This approach is thought to offer the greatest opportunity to improve the value of your investment, while also allowing for time to recoup losses in case of a market downturn, i.e. like the one now caused by the coronavirus crisis.

It can be a double hit, as not only have some people lost their jobs, but if they had remained in employment, they would have been still saving into their pension at quite attractive unit price levels in the stock market, so may lose out on the opportunity to smooth out the recent market losses.

Once the economy recovers and with the job market “back to normal” (whenever/whatever that is), those who pressed the pause button on their contributions may either have to consider an increase to their regular long-term savings to catch up what they had missed out on, or work for longer. I suspect the latter, especially as a number of millennials think they may never retire!

An article published in the FT Adviser in May 2019 stated that millennials spend £1,770 a month on average, more than twice as much as the annual State Pension allowance they are likely to get. The state pension can be up to £175.20 per week in 2020, which equates to about £750 a month. So, expectations and lifestyle changes will have to take a dramatic change.

Also, what we need to take into account that the average millennial has clocked up as many jobs as their counterparts in their fifties. The research, commissioned by Open Study College, found that 47% of millennials have completely changed careers since getting their first job. They jumped ship to earn more money, improve their work-life balance or tackle a new challenge.

Spot the pension problem here… millennials have likely accumulated a number of pensions (a number that is only going to get bigger as their career progresses) that in many cases they won’t know the provider, the charging structure, where its invested or the type of pension. Never mind on how to consolidate, if it’s the right thing to do, which is the most appropriate pension to keep or transfer or where to turn for help.  Left over time all these factors combined can have a detrimental effect on long-term saving.

There is no silver bullet to any of the above but financial education about long-term saving and the considerations of actions you can take now can have positive impact in the future.

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