According to recent research1, anyone wishing to retire at age 65 with a pension income (including a full State Pension) equivalent to the average UK annual salary of about £28,000, would need to accumulate a pension pot of nearly £450,000 to fund their retirement until they reached 100 years old. Whilst that may seem unlikely for many of us, the Office for National Statistics calculates an increasing number of us will attain this age in the coming decades.
Start saving early
In addition to stating the amount required to fund a comfortable retirement, the analysis also highlights how investing regularly across a working life provides the best hope of reaching that target. Indeed, it shows that if you begin saving when you are 25, you would need to invest around £235 a month to accumulate a suitably sized retirement fund.
If you delay starting by 10 years, this figure rises to £428; while delaying until you are 45 would push the number to £859 a month. These projections are based on a defined contribution scheme entering a drawdown pension arrangement on retirement. Another option would be to buy an annuity that provides an income for life.
But better late than never. Although in an ideal world it is certainly best to start saving for retirement at the earliest opportunity, other financial commitments can inevitably make this difficult. And it’s important to remember it’s never too late to save for retirement. If you are fortunate enough to have your employer make contributions to your pension plan, along with favourable tax treatment and potential for investment growth, any pension contributions you make in later life can still have a big impact on your standard of living in retirement.
All monies invested into a pension fund grow free of Capital Gains Tax and your contributions are enhanced by Income Tax relief at source. For example, if you invest £80, the government adds on tax relief (currently 20%) to enhance your contribution to £100. Higher rate taxpayers can claim additional relief through their PAYE coding. You may also need to consider the Lifetime Allowance, currently £1,073,100 and the Annual Allowance, which, for most people is £40,000.
Prioritise pension saving
While saving for retirement can seem to be a daunting task, the sooner you engage with the topic the better the chances of you being able to afford the retirement you deserve. Although it may still seem to be a long way off, you can guarantee retirement will creep up much faster than you expect. And careful planning now will undoubtedly make a substantial difference to the amount of money ultimately available for you to enjoy in retirement.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
1 AJ Bell, June 2019.