Nine out of 10 under-40s are regular savers but fewer than half are putting money into a pension, new research reveals.
Some 78 per cent have savings accounts and 51 per cent have cash Isas, which offer easy access to your money rather than locking it up until retirement.
Although just 46 per cent of under-40s said they had a pension, it is likely more are automatically enrolled into their workplace scheme, but don’t realise given it is an ‘opt out’ system.
Savings choices: Young people who do save for retirement will eventually gain outsize benefits from doing so, due to the compounding effect which works best over long periods
Nottingham Building Society said its survey of younger people revealed them to be ‘disciplined and regular savers’, with those who are saving and investing putting away £370 on average a month.
But although the number saving into a pension is lower, they are also setting aside an average £230 a month, according to the research.
Many young people have to save hard to get on the housing ladder after years of soaring property prices, while they also remain under pressure from student debt and rent.
But those who do save for retirement in their youth will eventually gain outsize benefits from doing so, due to the compounding effect which works most to people’s advantage over longer periods.
What is compounding?
Compounding is what happens when interest and/or investment returns are added to your savings, after which you earn them on the larger combined sum.
As this process of adding returns is constantly repeated over the years, it eventually boosts your pot to what can seem massively improbable sums to you at the outset.
Read more here about how compounding makes savings grow exponentially, when given enough time.
The successful Government pension auto enrolment initiative means people who don’t opt out will benefit from compounding, without needing to understand how it works.
The Nottingham study found that under-40s are overestimating how much the state pension is worth, with one in four believing it currently pays £10,000 or more a year.
The full flat rate state pension for those retiring after April 2016 is £164.35 a week, or just over £8,500 a year.
But the building society said the main reasons for under-40s not saving into a pension was their focus on paying off debt, with some 22 per cent wanting to get out of the red before investing for retirement.
A slightly smaller number said they preferred to spend their money than save for old age.
Numbers using the Lifetime Isa were too small to be included on the list of main savings and investing accounts and schemes available below.
Number crunching: Where are under-40s choosing to save? (Source: Nottingham Building Society)
Lifetime Isas allow under-40s to save for a home and retirement at once, and the Government is offering free top-ups worth up to £32,000 if you max out your fund during your younger to middle-aged years.
However, financial experts say they are a inferior retirement product when compared with a workplace pension – although they can benefit savers who simply empty their pot on buying a home.
Auto-enrolment rules mean employers have to pay into pensions, which means people forgo free money by sticking with a Lifetime Isa instead of squeezing the maximum contributions possible out of an employer. Read more here about the pros and cons if you are considering a Lifetime Isa.
Nottingham’s director of member services, Tina Hayton Banks, said: ‘It’s refreshing to hear so many under-40s have developed a savings habit and are disciplined about putting away money each month but disappointing that they’re clearly not as committed to pensions.
‘With an aging population that sees people living longer, many will experience a retirement shortfall if they don’t pro-actively prepare whilst they are young and this generation will need to do more due to rising house prices and changes in state pensions.
Nottingham Building Society surveyed more than 1,000 under-40s last month.
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