The traditional model of saving for retirement, often perceived as a steady, month-by-month marathon, may be setting individuals up for financial insecurity, according to recent analysis. The current system, where a fixed percentage of earnings is contributed to a workplace pension, fails to account for the increasingly irregular nature of modern working lives.
Career paths are no longer linear. Gaps in employment due to factors such as young people not being in education, employment, or training (NEETs), caring for relatives, ill health, or redundancy are becoming more common. For instance, a young person out of work for even a year could see a significant reduction in their total retirement savings by the time they reach retirement age. Calculations suggest a 22-year-old earning £35,000 annually who takes a year off could have £31,500 less in their pension, assuming a 10% total contribution rate.
Furthermore, the evolving job market, influenced by advancements like AI, is expected to cause further disruption. This could lead to job displacement, necessitating retraining and increasing the risk of redundancy. Even those not directly impacted by job loss may face longer working lives due to rising retirement ages, making consistent, steady saving more challenging.
In response to these challenges, a new approach is being advocated: 'pension sprints.' This strategy involves making larger, concentrated contributions to pensions during periods of financial windfalls, such as receiving a bonus, an inheritance, a redundancy payment, or a pay rise. The idea is to 'pile in as much as you can' when financially able, creating a buffer to compensate for inevitable periods when contributions may be lower or non-existent.
This method is likened to a playground game where participants advance when the 'grandmother' figure's back is turned and freeze when she looks. In this analogy, the 'sprints' are the periods of concentrated saving, allowing individuals to build up a surplus. This approach could even lead to a higher overall pension pot compared to consistent, lower contributions. For example, an individual taking five years out of work at age 35 could see their pension fund increase if they doubled their contributions for five years prior to their career gap. Similarly, a year out at age 55 could be offset by increased savings in the preceding year, potentially leading to a modest increase in the pension fund.