Euronews Business explores why many European adults still struggle to save enough for a pension and what are the best ways to save for retirement.
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A recent study by the Irish Competition and Consumer Protection Commission (CCPC) found that 21% of Irish adults are not planning for their retirement, which is 4% more than in 2023. are.
The study included 739 interviews and found that one in five people aged 45 to 64 were not currently receiving a pension. 46% of 18- to 24-year-olds also did not have a retirement plan. Additionally, approximately 66% of respondents had never spoken one-on-one with a financial planner.
Cost of living, age and inertia have emerged as some of the main reasons why Europeans are not saving as much as they would like for their pensions. But for those who manage to save money for retirement, saving for a pension can offer attractive tax benefits.
Commenting on these tax benefits, Dr Ylva Beckström, Senior Lecturer in Finance at King’s Business School, told Euronews: you invest. Therefore, we recommend investing when you can.
“If your salary increases, you receive a bonus or monetary gift, or your expenses decrease, consider increasing your contributions. Be aware of the annual tax-free contribution limit.
Additionally, when receiving a pension, the income received at retirement is often counted as income and taxed, but there are cases where a portion of the payment is tax exempt. ”
What’s stopping Europeans from increasing their retirement funds?
CCPC research shows that the biggest reason some Irish adults don’t save more for retirement is simply because they can’t afford to save. Other factors include being new, not having a stable job, being too young, and not understanding how pensions work.
About 6% of respondents said their employer did not inform them about or encourage them to take up a pension plan, and 4% said they would rely on other sources of income in their later years. Additionally, about 3% of respondents said they had no plans to retire, and 3% felt it was too late to start collecting pension benefits.
However, these factors are not unique to Irish adults, as many other Europeans are also struggling with the cost of living crisis, the impact of the pandemic, lack of personal funds and a reduced appetite for risk-taking.
The pandemic continues to have a significant impact on pension savings levels
Michael König, academic director of the Strategic Management Program for Executives at the WU Executive Academy in Vienna, told Euronews:
“COVID-19 has certainly had a significant impact on pension savings in Europe. In times of high uncertainty, such as the pandemic and subsequent recession in many European countries, citizens have reduced their retirement savings and , the pension gap between individuals has widened significantly.
“This is a dangerous development as it has the potential to increase poverty among the elderly. Pension systems vary across Europe, including statutory pension systems, occupational pensions and individual voluntary funded pension systems, especially the latter. The pandemic and post-pandemic impacts continue to take a toll as the population becomes more risk-averse and less confident in their future.
“A way to combat this may come from behavioral economics. It is essential that governments encourage citizens to take a more positive view of the future and increase public confidence. A renaissance in financial literacy is also urgent. , which addresses the important question: “Why should Gen Z save for their pension?”
“Unable to know how to critically evaluate investments, FOMO (fear of missing out) is rampant and, as the FTX crypto collapse showed, people are lemming-like at products they don’t fully understand. chase and lose money.
“Another effect is extreme risk aversion: if anything that is risky is considered risky, why would one want to voluntarily invest in a private pension scheme where the outcome is uncertain? • Improved financial literacy will enable citizens to make informed decisions and invest in a more rational manner, which will reduce the effects of certainty and short-termism. ”
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“Besides the fact that many people can’t afford to save for the future, there are several other factors that impede their ability to save for retirement,” Bakstrom said.
“Most importantly is the lack of financial knowledge. Financial services and pension providers are of no help here. The language and terminology used is incomprehensible to most people. When exposed to complex documents that are not understood, not studied in school, financial insecurity can lower people’s confidence and cause them to avoid saving for retirement at all. .”
George McNeil, a financial planning specialist at UK-based DGS Chartered Financial Planners, told Euronews: “The main reason is the cost of living crisis that not only the UK but the whole of Europe has experienced.
“The cost of necessities such as food, petrol and fuel has increased significantly, making other ‘discretionary spending’ such as long-term money savings (such as pensions) a lower priority, and money being taken away from long-term things. From the transferred (pensions) to the short term (bills and daily expenses). The war between Ukraine and Russia has also increased the cost of fuel (and other items) in Europe.
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“Inflation in the UK reached 11.1% in October 2022, the highest level in 41 years. It also means that locking up money at the age of 57 is becoming less attractive, especially for young people. ”
How much should you ideally have saved for retirement?
The amount of retirement savings you need has been endlessly debated, as it depends on several factors, including your current lifestyle, type of job, and retirement plans.
Bakstrom said: “It is important to know how much you need to save for retirement and what you need to do to achieve it. For example, if you need an annual income of around 30,000 euros, you will need to save at least 250,000 euros. Masu.
“The amount of savings you need also depends on the age you start saving for retirement and the amount your government contributes to your retirement income. So start saving early and how much you can save annually to reach your goals. There are several pension calculators available online that can help you with this.
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Mr McNeil said: What kind of life do you want to lead in retirement? Do you want to stop working at age 55 or 75? Consider downsizing. Do you want to give money to future generations? etc.
“However, the Retirement Living Standards Study (conducted by Loughborough University) found that a ‘minimum’ retirement allowance for a single person is £14,400 (€17,116) a year, and a ‘comfortable’ retirement allowance of £4. It is known to cost £3,100 (€51,230). ) per year.
For couples, the minimum retirement allowance is £22,000 (€26,150) a year, and the ‘comfortable’ retirement is £59,000 (€70,130) a year.
“The full UK state pension is £11,500 (€13,669) a year, so this provides some ‘bare level’ retirement benefits, but if you want more you’ll need to save.”
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Jonathan Watts-Ray, founding director of financial welfare and retirement firm WEALTH, said:
“A single person needs around £14,400 (€17,116) a year to achieve a minimum standard of living (this is enough to cover all the needs of a retiree, plus a holiday in the UK, about once a month. ); for a moderate standard of living, £31,300 (€37,204) per year (with one trip abroad per year and several times a month); and £43,100 (€51,230) a year for a comfortable standard of living (which means you can be more spontaneous with your money and get regular beauty treatments). You can also get an overseas holiday or even a mini-holiday in the UK several times a year).
“For couples, it’s £22,400 (€26,625), £34,100 (€40,532) and £59,000 (€70,130) respectively.
“For those who are struggling with not having enough savings, it may be worth delaying retirement or continuing to work part-time. This will allow them to pay higher pension contributions and reduce their tax You will be able to use your relief and employer contributions for a longer period of time to increase your savings.”
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What is the best way to save for retirement?
As for the best way to save for retirement, McNeil says: “The best way to save for retirement is pretty simple and involves three factors: tax efficiency, regular savings, and compound interest.
“When you are 30 years old and saving for retirement in 30 years, every penny counts and every decision “compounds” year after year. So saving in a pension (and with tax breaks and tax-free growth) or an Individual Savings Account (ISA) can help your money grow faster without worrying about tax hurdles. Plus, with pensions, the government gives you free money (tax breaks) to accomplish this, so take that free money!
“Regular savings is about making it a habit. When you get paid each month, you can set up a direct debit so it happens automatically and you don’t have to make it manually. These decisions become more complex over time. It will be.
“Compound interest means that if you save £1,000 into a pension, it grows by 10% and now it’s £1,100. Then if the market does well and it increases again by 10%, the growth is compounded even more.”
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“A final note is automatic enrollment. Since 2012, your employer is legally required to put money into your pension (conditionally). Again, this is free money, so don’t turn it down. Let them put in some extra money for their retirement.”
Mr. Baeckström emphasized: “The most important thing is to know what is available to you. First, learn about your rights. For example, are you employed? Is your employer contributing to your pension? If so, can I increase my donation?
“Make sure you understand the pension system. If you are not enrolled in a pension plan because you are self-employed or on leave, be sure to find out what kind of system is available. When investing, be sure to Think strategically and over the long term, and diversify your investments to ensure your portfolio can withstand risk.The performance of asset classes varies depending on economic conditions.Higher costs can hurt performance. Please be aware of the costs.”
On how people who have started saving for retirement can get that money back, she says: A good way to catch up is to maximize your contributions as much as possible. Find out what your total annual tax-free contribution limit is. This is the amount of your gross income that you can invest in any given tax year and receive a tax benefit. ”
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Disclaimer: This information does not constitute financial advice. Always do your own research to ensure it is appropriate for your particular situation. Also remember that we are a journalist’s website and aim to provide you with the best guides, tips and advice from the experts. Any reliance you place on the information on this page is strictly at your own risk. ”
