Topping up pension contributions by just 2% over the course of a career could lead to £108,000 more in retirement, new analysis from Standard Life, part of Phoenix Group, reveals.
The analysis demonstrates the long-term impact that changing pension contributions can have on retirement outcomes. For example, someone that began working full-time with a salary of £25,000 per year and paid the standard monthly auto-enrolment contributions (3% employee, 5% employer) from age of 22, would amass a total retirement fund of £434,000 at the age of 66*. However, if they were to increase their monthly contributions by 2% (5% employee, 5% employer) from the age of 22, they would accumulate £542,000 by the age of 66* – £108,000 more than standard contributions would achieve. Making higher contributions would have an even bigger impact on a retirement pot – even a 1% increase in contributions would produce £54k of additional savings, just under 20 months average salary for a UK full time worker.
| Total retirement fund at age of 66* | |||||
| Standard contributions of 3% employee and 5% employer | Contributions of 4% employee and 5% employer | Contributions of 5% employee and 5% employer | Contributions of 6% employee and 5% employer | Contributions of 7% employee and 5% employer | Contributions of 8% employee and 5% employer |
| £434,000 | £488,000 | £542,000 | £597,000 | £651,000 | £705,000 |
| +£54,000 | +£108,000 | +£163,000 | +£217,000 | +£271,000 | |
*assuming 3.50% salary growth per year, and 5% a year investment growth. Figures are not reduced to take effect of inflation. Annual Management Charge of 1% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied.
The calculations show that even a small increase in monthly pension contributions can have an extremely significant impact over the course of a career, demonstrating the power of compound interest. Starting a pension early in life and leaving it to grow means compound interest will build each year, and combining this with increased monthly contributions has a powerful effect on eventual retirement outcomes.
Dean Butler, Managing Director for Customer at Standard Life said: “It’s amazing to see how a relatively small increase in contributions can significantly boost the pension you retire on by tens of thousands of pounds. While pension payments may not be the top priority when you begin your career, or when finances are feeling squeezed, it will pay off in future. If your finances and your circumstances allow, even a slight increase in the contributions you make to your pension, will help boost your retirement outcome.
“Our calculations show that a 2% increase in monthly contributions over the course of your career, could lead to an extra £108,000 in retirement. For those in a position to do so, consistently paying into a pension from as early an age as possible and topping up payments, especially in your 20s, 30s or early 40s, can make a massive difference over time. Some employers will also match the contributions you make, giving your pot a further boost. So if you’re able to save into a pension and increase your contributions above the standard levels, your future self is likely to thank you for it.”
