Is it too late to start saving for your pension?

Did you start saving for your pension early? If not, or if you’re more of a last-minute type of person, then don’t worry. There’s always time to formulate and implement your retirement savings plan – as we explain below.

We can’t all be early birds

A good financial planner will tell you it’s best to start saving for retirement early.

The arithmetic speaks for itself. A simple savings calculator says if you start saving £100 a month, from age 25, at a growth rate of 5.25% (the current Bank of England base rate), you should amass a sum of £158,464 by the time you hit 65.

Start much later – say age 45 – and you compound interest has less opportunity to work its magic. By 65 you’d have just £41,893. These numbers exclude tax considerations.

They also exclude a lot more: repaying student or other debt, saving for a home deposit, living expenses, children … the calls on your hard-earned money can appear endless.

Recent research says the average Briton starts saving for retirement at age 36. But it also says just 37% of millennials and 29% of Generation X – that’s people born 1965-1996 – think they have saved enough.

If this sounds like you – a lot of hard work that isn’t reflected in your retirement pot – then don’t panic. You have options to get on track.

Find your retirement number

It’s often best to have a rough idea of how long you’ll live. The government’s life expectancy calculator is handy.

It says a 53-year-old woman should expect to live to 87, has a one in four chance of making it to 95, and one in ten of making it to 99. A 37-year-old man’s equivalent numbers are 84, 94, and 98.

So, if they both think they can work to age 66, she has 13 years to amass a sum that needs to last her for 21 years. And he has 29 years to build a pot that covers him for 18 years.

If you haven’t done your own version of these calculations, it’s worth having a go now. That’s because they help you arrive at a retirement number: the sum of money you will probably need, at the moment you retire, to see you through to the end.

It’s also worth bearing in mind that, in general, life expectancy rises as your age goes down. So, if our woman above was 37, she’d expect to live a little longer, until 88.

You also need to consider that some of your retirement money may need to cover future ill health.

Now, it costs around £800 a week for a place in a care home and £1,078 for a nursing home. These sums will surely rise with inflation in the future.

Remember the tax benefits

Your primary tool for fixing retirement planning is likely to be a pension. It’s essentially a parcel or box in which you can place regular savings and investments, and then leave them alone while they grow.

Most pensions offer tax relief.

If you’re a higher rate taxpayer, you’ll get the usual 25% tax relief (where a £1,000 pension contribution automatically becomes £1,250) plus additional tax relief of 20%, which is dependant on how much you earn above the higher rate tax band (currently £50,270).

So, if you earn £55,000 a year, your (say) £5,000 contribution will gain you 20% tax relief – plus 20% relief on the additional £4,730 (£55,000 – £50,270), which is an extra £946.

Every little helps.

And compounding can help too – that extra £946 a year could turn into about £12,000 after ten years and about £32,000 after 20 (using the same criteria as above).

Your boss can help

Employers usually pay into pensions as well.

This is a minimum of 3%. An annual salary of £55,000 therefore should attract employer contributions of at least £1,650 per annum. Then you can add compounding on top – which might get you to about £21,000 after a decade, or £57,000 after two.

Of course, some companies pay more than 3%. Others pay up to a certain limit and match your contributions. It’s always worth making sure you get the very most of this (essentially) free money because it will all help you hit your retirement number.

So will the State

Aside from tax relief, the government helps with your state pension. If we’re talking higher rate taxpayers, this may well be comparatively small beer.

But it’s not to be sniffed at. The full State Pension is £203.85 a week – paid every four weeks, so around £10,600 annually. You can check what you’re eligible to get at the State Pension forecast website.

Be flexible

Pensions are not the only option here.

You may have your savings and investments spread cross pensions, ISAs, other tax efficient vehicles like venture capital trusts, and property.

Each has its own benefits and you can draw money down from them in different ways – optimising your wealth, the tax you’re liable to pay, and the income you need to fit your desired lifestyle.

For example, your pension can give you a tax-free lump sum. Your property might give you a fairly stable monthly income, with a growing capital value. Your ISAs and other tax-wrapped investments might offer a more variable quarterly income.

Above all, don’t forget that while it’s always good to start early, it’s also never too late.

And, with a great financial planner on side, there’s always a course to be charted between now and your retirement goals.

We work with clients at almost every stage of their career and of life, some in moments of vulnerability – but all wanting to make the most of their money. We can help.

[1] https://www.moneysavingexpert.com/savings/regular-savings-calculator/

[2] https://www.standardlife.co.uk/about/retirement-voice

[3] https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

[4] https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/

[5] https://www.gov.uk/check-state-pension

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.