A slow start can be costly

Planning for retirement is just one area in which, with the benefit of hindsight, many people wish they had taken action earlier.

July 17, 2020

Research from Aegon found that 51% of workers wish they had started saving for a pension earlier, or regret having taken a break from saving; 14% of workers said their biggest regret was not making a financial plan for their pension.

The biggest regret of those retired was, for 38% of respondents, putting off making a savings decision; for 18% it was poor planning.

On the positive side, 42% of those surveyed said their best savings decision was joining their workplace pension or saving into a personal pension; 19% felt their best pensions decision was to save for retirement from an early age.[1]

Indeed, an earlier study by Prudential found two in five pensioners regret retirement-planning mistakes which have left them struggling financially. Nearly one in five said that they didn’t save enough for retirement, and 15% regret not starting to save earlier in their working lives.[2]

Save for tomorrow

Understandably, many of us still have misgivings about locking our money away for decades – especially if we have more immediate calls on our income. Nevertheless, if we’re serious about planning for the future, we need to put away surplus income today, since doing so funds our lifestyles tomorrow.

Pension contributions attract tax relief on the way in and they accumulate capital gains free of tax once inside. When you access your pension savings, the first 25% is normally tax-free. While you cannot draw on the funds until your 55th birthday, this does protect your pot against the temptation to tap into it until then.

Getting off the mark

How much pension income you need in retirement will be determined by many factors, including your health, your living expenses and your desired lifestyle. Unfortunately, there’s no one-size-fits-all answer. However, as stated in August 2019 by the Office for National Statistics, the average (median) earnings in the UK are £29,588 per year; so a pension income of around £20,000 may be on average the minimum requirement.

Therefore, even if you qualify for the full single-tier State Pension of £9,110 a year, you would be looking to find at least £11,000 a year from your other pensions. Achieving this, however, can be very challenging for those on low incomes, or those with unpredictable earnings – but especially for those who delay saving.

Assuming that the fund would be used to purchase an annuity, someone in their mid-20s who starts saving into a defined contribution (money purchase) pension today would need to save around £297 a month to achieve an income of £12,000 by the time they reach State Pension age. Someone who delays until their mid-30s would need to put away £420 a month; and a 45-year-old who hasn’t started a pension would need to start saving around £714 a month.[3 ]

These figures are only examples and are not guaranteed: they are not minimum or maximum amounts. The amount achieved would depend on how the investment grew and on the tax treatment of the investment. The amount achieved could be more or less than this.

Playing catch-up

The sooner we start, the more choices we have later. The power of compound returns, or gains on gains, means 10 or 20 years can make a big difference. However, you should never think that it’s too late to start saving, or that you can’t catch up. There are real opportunities to makeup lost ground if you have the available means and allowances.

You can put as much as you want into your defined contribution pension, but you’ll only get tax relief on pension contributions up to £40,000 each year, or 100% of your earnings if lower. (High earners have a reduced, ‘tapered’, annual allowance.) Pension providers generally claim tax relief for you (called ‘relief at source’) at a rate of 20% and add it to your pension pot, which actually creates a 25% uplift in the sum; therefore £80 becomes £100. Higher rate taxpayers can claim an extra 20% via their annual tax return; a £40,000 contribution could effectively cost a higher rate taxpayer just £24,000.

Moreover, you can make use of allowances from the three previous tax years if these haven’t been utilised.

In any case, the fact remains that the best way to secure a comfortable retirement is to save as much as possible as early as possible in your working life, and take financial advice. The longer you delay saving, the harder it will be to build the kind of fund that will see you through retirement.

[1] Aegon study of 657 working adults over the age of 18 and 227 retired people, February 2018

[2] Prudential, ‘Regrets? They’ve got a few – but pensioners are happy in retirement’, April 2016

[3] Nutmeg, accessed 6 September 2019; with an annual return assumption of 5%

For any queries relating to the information contained, please contact a Financial Adviser at Blythswood Associates and we would be happy to help.

Links to third party websites exist for information only and we accept no responsibility or liability for the information contained on any such sites.

The value of an investment with St. James's Place will be directly linked to the performance of funds you select and therefore go down as well as up. You may get back less than invested.

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