The exact age you need to start taking your pension seriously – or risk a poor retirement
It can be tough to convince people to focus on their pension when they're still a long way off from retiring – however, research suggests there's a certain age threshold beyond which delaying starts to risk severely damaging your savings.
According to Standard Life, the exact age when a person's retirement plans should be in place is 36.Delaying consideration of what retirement should look like from this point forward might mean you won't have enough.
The Telegraph Money news outlet will help explain what this development means for your pension investment plans.
The retirement clock starts ticking at the age of 36
Preliminary findings from the research suggest that marking 36 is a "watershed" moment, where individuals start to feel more confident and organised, looking towards the future and actively planning for their retirement.
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A great deal hinges on how you've accrued your savings to date - and how you intend to do so going forward.
Pension plans for younger workers must include financial protection, for although primary responsibility lies with the worker, the burden should not rest solely on their shoulders.
Sangita Chawla of Standard Life said: "As defined benefit pensions are no longer an option, it's now up to individuals to take control of their future financial security. However, those who are doing so will face a number of difficulties including housing costs, the current cost of living crisis, and the added pressure of student university fees."
It is probable that many individuals will have to make sacrifices when it comes to meeting the cost of living now and saving for their retirement.
What about auto-enrolment?
Employees in the UK typically put aside 8%, comprising half from their own earnings and a quarter from their employer, into their pension, as stated by Standard Life. By the time they reach 36, the amount rises to 35%.
“Regular, small savings in early years, coupled with the steady increase of value over time through long-term investments, allows individuals to accumulate a respectable amount of savings towards their retirement."
It's vital to consider what you want your retirement to be like, Mr Morrissey stated: "Individuals tend to have varying expectations, and as a result, the level of saving required can be significantly different."
The Pensions and Lifetime Savings Association, a trade organisation, considers a satisfactory retirement one where you can take three-week holidays abroad each year, employ a car and afford luxuries like theatre excursions.
It would currently amount to £43,100 per year for a single person.
Alongside the maximum new State Pension, which is £11,502.40 per year, from 2024-25, you would also require a further £31,600 in private income annually.
According to the PLSA, for a couple, the annual amount is £59,000 as shown in the following table.
When looking at the current numbers, take into account that inflation will cause future retirees to require a significantly larger sum. To put it bluntly, you will have to put aside a considerable amount.
It's advisable to invest in a pension boost in your late 30s.
If you decide to boost your pension contributions to 36, you may wonder just how much of an impact it will have. We've asked stockbroker Hargreaves Lansdown to run the numbers for us.
Let's consider the scenario of Joe Bloggs, who starts a full-time job earning £25,000 per year and contributes the minimum required amount, 8pc, with 5pc coming from his own salary and 3pc from his employer, from the age of 22 into a workplace pension scheme.
He could end up with a pot of approximately £500,000 by the time he reaches the age of 68. This calculation is based on a 5% annual return on investment, an annual salary increase of 3.5%, and an annual investment charge of 1%. No provision has been made for the impact of inflation.
However, if Mr Bloggs increased his retirement contributions by three percentage points to 11% from the age of 36, this might result in a significantly larger pension pot, of £630,000, by the age of 68 – an additional £130,000.
Ms Morrissey says, "This shows that increasing your pension savings in your thirties can give your pension fund a significant boost when you retire, allowing you to have 'comfortable' living circumstances in your retirement."
Don’t overlook the potency of compounding interest
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It's also worth noting that saving for a pension from an early age can be particularly beneficial because it can take advantage of the snowball effect of interest accumulating over time.
Gary Smith from the wealth manager Evelyn Partners stated: "These 'returns on returns' can greatly enhance a pension fund over the coming years through a cycle of exponential growth. Given this, with over 30 years remaining until state pension age, 36 is a suitable age at which to start taking pension savings more seriously."
He accepted that there could be numerous financial pressures on individuals in their thirties.
People will struggle to make extra pension contributions beyond the 8% auto-enrolment minimum, what with increased costs of housing, travelling and looking after children, all adding up to a heavy burden on their finances.
What if you're unable to make these extra payments until a bit later on in your life?
The reassuring news is that even if you are unable to increase the amount you contribute until you are in your 40s, or even 50s, there is still cause for optimism.
Ms Morrissey stated: “Life can sometimes get in the way, bringing unforeseen expenses as a result. It's essential not to worry if you've not yet been able to increase your contributions as planned.”
It's never too late to make a positive impact. Adding to your pension as often as you can will significantly affect how much you receive in retirement.
If you leave it until age 40 to give irregularly to a workplace pension scheme, for example, at a standard rate, your weekly pension could be up to a fifth lower than if you had started contributing regularly at the age of 25.
If our hypothetical saver, Joe Bloggs, had been making the minimum 8% automatic pension contributions up to age 40 and then increased them by 3 percentage points to 11%, he would have £609,000 by the time he's 68. If instead, he raised the increase by another percentage point to 4%, at the age of 40, the total would be £645,000 by the time he's 68.
If you delay until 45 to boost contributions, you may find that you've exhausted your capacity under the Flask scheme, thereby limiting your overall potential for a top-up payment.
If Mr Bloggs increased his contributions by 3 percentage points on his 45th birthday, he would receive £588,000 by the time he reached 68. If Mr Bloggs was able to increase his contributions to 4 percentage points upon turning 45, this would leave him with £617,000 at the age of 68.
If you delay until you reach the age of 50 before adding extra money to your pension,
Even if Mr Bloggs waited until 50, this means a three percentage point increase would leave him with £568,000, while a four percentage point increase would give him £590,000 in his pension pot.
It’s never too late
This shows that for those who are able to do so, actively adding more to your savings or making a one-off payment in advance could be a thoughtful gesture towards financially supporting your future self.
Make use of tools
It's worth viewing online calculators, which can also aid you in seeing how much income you could get through an annuity or income drawdown at the time of your retirement.
Your employer's pension scheme or Self-Invested Personal Pension (SIPP) provider will typically be able to supply you with such functionality.
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