While many people aspire to retire as early in life as possible, the additional savings you can make during the latter years of a career can have a positive disproportionate impact on the size of your pension pot.
While many people aspire to retire as early in life as possible, the additional savings you can make during the latter years of a career can have a positive disproportionate impact on the size of your pension pot. Analysis by Standard Life, part of Phoenix Group, demonstrates how working for an extra couple of years – when a combination of peak earnings, higher pension contributions and compound interest can have a greater impact – could significantly boost your retirement income.
In April 2028 the normal minimum pension age will increase from 55 to 57, meaning you will need to be aged 57 or older before you can start taking money from your pension. This may be unpopular, particularly among workers who will be approaching this age in the next few years, but an additional two years of pension saving between the ages of 55 and 57 could make a notable impact on your total retirement pot.
Standard Life’s analysis finds that those who begin working on a salary of £25,000 per year and pay the standard monthly auto-enrolment contributions (3% employee, 5% employer) from the age of 22, would build up a total retirement fund of £171,000 by the age of 55*. However, retiring just two years later, at the future normal minimum pension age of 57, would result in a total pot of £193,000 – £22,000 more as illustrated by the figures below:
|The impact of the increase in normal minimum pension age from 55 to 57|
|Retired at 55 years old||Retired at 57 years old||Retired at 66 years old|
*if beginning working with a salary of £25,000 per year and paying 3% monthly contributions into a workplace pension at the age of 22 and assuming 3.5% salary growth per year, and 5% a year investment growth. Figures reduced to take effect of inflation, assumed to be 2%. Annual Management Charge of 1% assumed. The figures are an illustration and are not guaranteed.
Why do later years have such an impact?
Retiring early will mean you miss out on the benefits of continued compound interest towards the end of your career when it can be extremely impactful. By building a pension over time and leaving it to grow, compound interest will build each year too. So, towards the end of your career your pot is likely to be larger. Those who have been working for several decades may well be earning more in terms of salary, meaning pension contributions could be greater and the impact of compound interest will also be much more significant, especially compared to the start of your career when you first start paying into your pension. Of course, there is a balance to be struck, but these figures highlight the financial implications of the rise in normal minimum pension age and the impact working two additional years can have on your pension pot. Also, a couple of extra years could buy some extra time for savers whose pots have been hit by recent volatile markets, and who might be worrying about the increased cost of retirement during a period of high inflation. Indeed, those who continue paying into their pension right up to 66 could add a further £140,000 taking their total pension pot to £311,000.
Jenny Holt, Managing Director for Customer Savings and Investments at Standard Life said: “Leaving your pension pot untouched towards the end of your career can significantly increase the total amount you retire on by tens of thousands of pounds. This is largely due to the power of compound interest, which gradually builds over time. In five years’ time, people will not be able to withdraw from their pension until they reach age of 57, and this extra two years of accumulation should be beneficial to many, especially as retirement funds are going to be expected to stretch further than before, as people tend to live longer and are spending more time in retirement.
“For those in a position to do so, consistently paying into a pension from as early an age as possible can make a massive difference over time, and as our analysis shows, the biggest impact can happen towards the end of your working life. This is something worth being aware of and factoring into your decisions as you approach retirement and start to consider stopping work – as that period can potentially influence your eventual retirement lifestyle too. Clearly, nobody can put a price on quality time in retirement – so it’s worth having a think about the type of lifestyle you’d like when you do retire and use that as a basis when deciding if the delay is worth it. The Retirement Living Standards tool from the Pensions and Lifetime Savings
Association is a great place to start, clearly showing what life in retirement looks like at three different levels – Minimum, Moderate and Comfortable. As well as everyday costs, the tool
factors in what’s needed for extras – gifts, holidays and large purchases etc, alongside the one-off expenses that come up through life.”
Standard Life offers further tips to maximise pensions savings throughout your working life:
- Make sure you’re taking advantage of all the benefits of your pension plan and your employer offers. If your employer offers a matching scheme, where if you pay additional contributions your employer will match them, consider paying in the maximum amount your employer will match to get the most out of it.
- Keep an eye on how much is in your pension, on a regular basis. If you know how much you have, you can work out how close you are to the retirement lifestyle you want. As UK workers now move jobs every 5 years on average, you might find you have a number of small pots – it might be worth considering bringing them all into one plan to make your savings easier to track.
- Getting a bonus this year? Deciding to pay some or all of your bonus into your pension plan could save you paying some big tax and national insurance deductions. Meaning you could keep more of it in the long run, and it could be a great way to give your pension savings a boost.
- Even a small amount could make a big difference in the long term, especially if you’re starting young. If you’re able to, think about paying a little more into your pension when you get a pay rise or have a little extra savings.