Euronews Business explores why a lot of European adults are still struggling to put enough in their pension pots and what the best ways are to save for retirement.
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A recent study by the Competition and Consumer Protection Commission (CCPC) in Ireland found that 21% of Irish adults do not have any financial plans in place for retirement, which was 4% more than in 2023.
The survey included 739 interviews and found that 1 in 5 of 45-64 year-olds do not have a pension at the moment. 46% of 18-24 year-olds also did not have any retirement plans. Some 66% of the respondents had also never spoken to a financial planner one-on-one.
The cost of living, age and inertia emerged as some of the key reasons for Europeans not being able to save as much as they would like for their pensions. However, for those who did manage to squirrel away funds for later life, saving for pensions can come with attractive tax benefits.
Regarding these tax perks, Dr Ylva Baeckström, senior lecturer in finance at King’s Business School, told Euronews: “Tax benefits vary by country but there tends to a tax saving for investing money in pensions whereby you do not have to pay tax on the monies you invest. Good advice is therefore to invest when you can.
“If you get a pay rise, receive a bonus, financial gift or your costs are lowered, consider increasing your contributions. Watch out for the annual tax free contribution cap.
Also, when taking your pensions, while the income you draw when you are retired is often counted and taxed as income, some parts of the payments can be tax free.”
What is stopping Europeans from putting more money aside for retirement?
The biggest reason for several Irish adults not saving more for retirement is because they simply can’t afford it, according to the CCPC research. Other factors included not having gotten around to it yet, not having a stable job, being too young or not understanding how pensions work.
Some 6% of respondents said that their employer did not inform them of a pension scheme or encourage them to get one, whereas 4% said that they would be relying on other income during later years. Some 3% of respondents also shared that they did not plan on retiring while 3% felt that it was now too late to start a pension.
However, these factors are not unique to only Irish adults, with a large number of other Europeans also struggling with the cost of living crisis, effects from the pandemic, a lack of personal finance and a decrease in risk-taking willingness.
Pandemic still having a major impact on pensions savings levels
Michael König, academic director of the Strategic Management for Executives Program at Vienna’s WU Executive Academy, told Euronews: “We still observe a pandemic effect, which is in my opinion the biggest reason for Europeans struggling to save for pensions in the last few years.
“Covid certainly had a huge impact on pension savings in Europe. In times of high uncertainty as during the pandemic and the subsequent recession in many European countries, citizens reduced their savings for retirement, and subsequently, individual pension gaps increased significantly.
“This is a dangerous development as it potentially increases poverty in older age. The pensions system is diverse across Europe. We find statutory pension systems, occupational pensions, and individual voluntary funded pension plans. Particularly the latter continues to suffer immensely from pandemic and post-pandemic effects, as citizens act more risk-averse and less confident in their own futures.
“A way to counteract this might be derived from behavioural economics. It is essential for governments to nudge their citizens into a more positive view of the future, and to increase their confidence. We also urgently need a renaissance in financial literacy, which addresses the crucial question: Why should GenZ save for pensions?
“Without knowing how to critically assess an investment, FOMO (fear of missing out) reigns, and people run like lemmings after products they do not fully understand, losing their money, as the cryptocurrency collapse of FTX showed.
“Another effect is radical risk-averse behaviour. If everything risky is seen as dangerous, why should one want to invest voluntarily into private pension plans with uncertain outcomes? More financial literacy would empower citizens to make informed decisions, and invest in a more rational manner. It would reduce certainty effects and short-termism.”
Baeckström also said: “Aside from many people simply not being able to afford to set aside savings for the future there are several factors that hamper people’s abilities to save for retirement.
“The most important one being a lack of financial knowledge. Financial services and pension providers do not help here. The language and jargon used are inaccessible for most people. Not understanding how retirement savings work, not learning about it in school and being exposed to complex documentation is anxiety-provoking. Financial anxiety reduces people’s confidence and can make them avoid saving for retirement altogether.”
George McNeil, a financial planning expert from UK-based DGS Chartered Financial Planners, told Euronews: “The primary reason has been the cost of living crisis that the UK, as well as all of Europe has experienced.
“The cost of essentials such as food, and petrol, and fuel has gone up so dramatically that other 'discretionary spending' like saving money for the long term (such as pensions) becomes less of a priority and money is moved from long term (pension) to short term (bills and every day spending). The Ukraine/Russia war has also increased the cost of fuel (and other items) in Europe.
“Inflation in the UK reached 11.1% in October 2022, a 41-year high, which has also meant that trapping money in pension (current age you can take it out is 55, rising to 57 in 2028) is less tempting for investors and younger people especially.”
How much retirement savings should one ideally have?
The amount of retirement savings one needs to have has been endlessly debated, as it depends on several factors, like current lifestyle, type of job, and retirement plans, amongst others.
Baeckström said: “It is important to know what amount of savings you need to have at retirement and what you need to do to achieve those. For example, if you want an annual income of around €30,000, you will need savings of at least €250,000
“The size of the savings you need also varies depending on the age you start drawing from your retirement savings and the contributions that the government makes to your retirement income. It is therefore critical to start saving early and work out how much to save annually to achieve your targets. There are several pension calculators available online to help with this.”
McNeil said: “There is obviously no hard and fast rule around this and it depends on many factors; what type of retirement do you want to live? Do you want to stop working at 55 or 75? Would you consider downsizing? Do you want to give money to future generations? Etc.
“However, the Retirement Living Standards research (performed by University of Loughborough) has told us that a 'minimum' retirement for a single person costs £14,400 (€17,116) per annum, and a 'comfortable' retirement costs £43,100 (€51,230) per annum.
For a couple it's £22,000 (€26,150) per annum for a minimum retirement, or £59,000 (€70,130) per annum for a 'comfortable' retirement.
"The full state pension in the UK is £11,500 (€13,669) per annum, so that gets you some of the way there for a 'minimum' retirement, but if you want more you'll have to have saved.”
Jonathan Watts-Lay, a founding director of financial wellbeing and retirement company WEALTH at work, said: “This can be difficult to estimate but the Pensions and Lifetime Savings Association (PLSA) provides some guidance around this.
“A single person will need about £14,400 (€17,116) a year to achieve the minimum standard of living (this would cover all a retiree’s needs plus a holiday in the UK, eating out about once a month and leisure activities about twice a week); £31,300(€37,204) a year for a moderate standard of living (one foreign holiday a year and eating out a few times a month, as well as being able to do more of the things you want to do); and £43,100 (€51,230) a year for a comfortable standard of living (which allows you to be more spontaneous with money, have regular beauty treatments, a foreign holiday and several UK mini-breaks a year).
“For couples, it’s £22,400(€26,625) , £34,100 (€40,532) and £59,000 (€70,130), respectively.
“If someone is worried that they haven’t saved enough, it may be worth delaying retirement or continuing working part-time. This would enable them to make more pension contributions, and they would be able to take advantage of tax relief and employer contributions for longer to build up their savings.”
What are some of the best ways to save for retirement?
Regarding some of the best ways to save for retirement, McNeil said: “The best ways to save for retirement are really, really simple and involve three things: tax efficiency, regular saving and compounding.
“If you are saving at 30 for retirement in 30 years then every penny counts and all decisions 'compound' year on year. So, saving into pensions (and getting tax relief, and tax free growth), or individual savings accounts (ISAs), allows your money to grow quicker without a tax hurdle. Moreover, with pensions the government gives you free money(tax relief) to achieve this, so take the free money!
“Regular saving is just making it a habit. When you get paid every month, set up a direct debit so it happens automatically and you don't have to manually do it. These decisions compound over time.
“Compounding means that if you save £1,000 into your pension, then it grows by 10%, so is now £1,100, and then the markets do well and it grows by 10% again then your growth is compounding and getting bigger.
“A last note is auto-enrolment. Since 2012 employers have to legally put money into your pension (subject to conditions). Again, this is free money, don't turn it down, and allow them to put extra money in to fund your retirement.”
Baeckström highlighted: “The most important thing is to learn about what is available. First, learn about your rights. For example, are you employed and is your employer contributing to your pension? If so, can you increase the contributions you make?
“Make sure you understand your pension scheme. If you are not enrolled in a pension because you are perhaps self employed or on a career break, make sure you find out what is on offer for you. When investing, think long term, strategic not tactical, diversify your investments so that your portfolio can withstand risk: asset classes perform differently depending on the economic climate. Be aware of costs as high costs can cripple performance.”
Regarding how someone who starts saving later in life for retirement can catch up, she said: “While It is never too late to start, it is best to start early. A good way to catch up is to maximise contributions as much as you can. Check what your total annual tax free contribution cap is. That is how much of your gross income can you invest in any tax year and still receive tax benefits.”
Disclaimer: This information does not constitute financial advice, always do your own research on top to ensure it’s right for your specific circumstances. Also remember, we are a journalistic website and aim to provide the best guides, tips and advice from experts. If you rely on the information on this page, then you do so entirely at your own risk.”